South African households are feeling the pinch, and many are spending a far higher percentage of their income on debt repayments than before. To alleviate financial stress, some homeowners may be looking at consolidating their other debts into their home loans, which charge significantly lower rates of interest than most other forms of credit, such as credit cards.
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However, you should consider carefully before taking this step. With any debt consolidation programme, you need to set realistic and manageable goals. There is no point in starting such a programme unless you are also very sure that you will be able to live reasonably comfortably with the steps you will need to take to achieve your goals.
Discipline
The experts advise that you should only consider debt consolidation with your home as security if you are a very disciplined borrower.
If you have lived in your home for more than five years, it is likely that the capital component of your home loan has been reduced to below the market value of the property. In this case, it may be worth your while to re-access a portion of the original loan and use this to pay off debts with a higher interest rate.
If your property’s value has increased substantially since you took out your home loan, you may want to consider refinancing the property or applying for a new and bigger loan. You could then use the additional amount to settle other debts.
If you choose this option, you should pay off the additional amount you have borrowed as fast as possible to get your mortgage liability back to the previous level.
Be aware that the bank will consider your application for a bigger bond amount as it would a new application. As with your initial application, they will want proof of income and expenses to assess whether or not you can afford to repay the monthly instalments on the new loan.
Costs
If you borrow the extra finance and extend the period over which the home loan has to be repaid, you should be aware that you won’t be saving money. This is because you will pay more in interest over the long term.
You should also be aware of the additional costs associated with extending your bond. These include valuation, bond registration and legal fees. If you don’t have the cash to cover these costs and add them to your debt, you will also be paying interest on them over the life of the loan.
Before deciding to consolidate your debt into your home loan, find out what interest rate you will be paying on your increased bond amount. It could be higher than the interest you have been paying on the initial loan.
A reputable mortgage originator will be able to negotiate on your behalf to ensure you get the best loan option to suit your particular financial circumstances.
Repayments
Once you have consolidated your other debts into your home loan, be sure to add all the money you have been paying off on other debts every month to your new mortgage repayment. This will help reduce the capital balance of the loan more quickly. You could even end up paying your home loan off faster than expected, which will save you many thousands of rands in interest.
It goes without saying that you should not take on any new debt or allow your credit card balance to increase again once you’ve consolidated all your old debt. If you are unable to pay your new higher monthly instalments, you will be putting the roof over your head at risk.
Writer : Sarah-Jane Meyer
