Equity-linked home loans allow you to diversify your investment out of property, with the option of paying off your loan and pocketing a tidy sum of money, but you should be aware of the risks.
Steve Heilbron, managing director of Investec Private Bank, says with an equity-linked home loan part of your monthly repayment plus an additional amount is channelled into unit trust investments. All that you pay off on your loan itself is the interest on the amount that you borrowed.
On a R500 000 loan over 20 years at an interest rate of 18,75 percent, you would pay R7 813 a month to cover the interest and you would have to pay an extra R790 a month, which would be used to buy unit trusts.
At some point during the loan period the growth on the unit trust investment could, in theory, allow you to pay off what you owe on your loan well before the end of the loan term.
After 20 years, for example, assuming the unit trust investment provided you with a 10 percent return, you could be paid R600 000. This would allow you to repay your R500 000 loan and leave you with a R100 000 cash windfall.
Heilbron stresses that the 10 percent a year return on unit trusts, while considered conservative, is not a guarantee and you can lose a portion of your capital if the market performs poorly.
A similar scheme based on endowment policies was the rage a few years back, but came under fire because of the poor performance of endowments and high upfront costs against high interest you must pay on loans.
The danger with the equity-linked loan is that if the investment does not perform, you could lose some of the money that you put into the investment and still be saddled with having to pay off the balance of your loan.
But as with high risk investments there is also the opportunity of achieving higher returns.
Equity-linked loans offer you the advantage of being able to diversify your investment from property into shares as well as certain tax advantages.
If, for example, you run a business from home, you may be able to deduct a portion of the interest on your home loan from your taxable income as it may form part of your expenses in running your business.
With a normal loan, the interest that you pay reduces as you pay back the capital, but with an equity-linked loan you do not pay the capital portion of the loan but rather accumulate an investment that could be offset against the loan at any time.
Also, the growth on investments in unit trusts, provided you are investing for the longer term, is not normally taxable in your hands because it is regarded as a capital gain. Obviously the interest portion of the unit trust distribution is subject to tax, but a R2 000 exemption annually applies to the interest income that you receive. Remember that this includes interest income from all sources.
Investec Private Bank also offers you the option of splitting your home loan in two and paying off part in the traditional manner and the rest being channelled into a unit trusts.
You can choose between one or more of Investec's unit trusts and the normal costs apply.
Nedbank and Permanent Bank offer equity-linked home loans, and Absa Bank, while it does not promote the product, will structure a deal for you if you want it.