Consolidate your debt into your bond

Private Property South Africa
Anna-Marie Smith

The use of mortgage bonds to settle smaller loans and credit purchases at hugely reduced interest rates is a tempting option.

A bigger bond at a lower interest rate that reduces short-term debt at a higher rate, and is settled sooner rather than later, can amount to considerable cash savings.

To avoid this potentially win-win scenario from becoming a fast-escalating burden however, economic gurus say that mortgage holders should focus on the difference between long- and short-term repayment periods.

Pay more in less time

Most important, they say is to apply the principle of never re-paying extra purchases over the same 20 or 30 year periods as mortgage bonds. This will achieve optimum cash savings when paying 9% interest, as opposed to anything up to 30% for short-term loans such as those for education, home alterations, cars or furniture.

Property professionals and banks, who advise long-term planning to cater for rising interest of at least 2%, emphasise this point even more for the re-payments of other credit purchases. Significant short-term cash savings are illustrated when looking at comparative interest rates and when re-paying one single home loan, as opposed to individual credit accounts. Although not ideal for banks, consumers can benefit from reducing their debt on purchases such as paying interest of 18% on personal loans, 20% on credit cards and 16% for vehicle finance.

Although a bigger bond does not require the extension of re-payment periods, mortgage holders need to be wise to the risks associated with creating one bond for all their debt. The best way to avoid being trapped into a bigger bond is to make every effort to maximise monthly repayments. This will soon reflect a sharp reduction of interest escalating on a bigger bond.

Short-term interest is high

The comparatively low interest of mortgage loans has become one of the most common motivators to finance essential tertiary education and cars – the reason being that additional short-term credit finance of these expenses at high interest rates can be crippling.

An additional benefit of a bigger bond is the greater predictability of debt re-payment, achieved by negotiating fixed or variable mortgage lending rates with banks. This will assist in long-term planning to predict whether regular re-payments can become a sustainable option, while maintaining good cash flow and sufficient disposable income.

Possibly the most important factor to remember is to avoid falling into the same spending patterns that created the over-indebtedness in the first place. While mortgage lenders are in the business of lending money, they by no means advocate the use of long-term debt to finance non-essential consumer purchases.

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