Consolidating your debt into your home loan account requires discipline and a plan. Here's how to do it.
With South African households spending an average of 40% of their income on debt repayments now, many homeowners are looking at consolidating their debts into their home loan accounts, which carry a much lower rate of interest than most other forms of credit.
But they must beware of jumping out of the debt frying pan and into the fire, says Shaun Rademeyer, CEO of SA’s biggest mortgage originator BetterLife Home Loans, who notes: “Debt consolidation using your home as security should only be undertaken by very disciplined borrowers.
And there’s no point in even starting a debt consolidation programme unless you set manageable goals and know that you can live comfortably with the steps you take in order to achieve them.
He says that if the capital component of a home loan has been reduced and is now well-below the market value of the home (which is generally the case if the owners have lived there for more than five years), it could be worthwhile to re-access a portion of the original loan and use this to pay off debts that carry a higher interest rate.
“Alternatively, borrowers who own a property where the value has increased substantially since they took out their mortgage may want to consider refinancing by taking out a completely new, larger loan, or a ‘further advance’ on their original loan and using the additional amount available to settle other debts.”
However, homeowners who do this should aim to pay off the additional amount they have borrowed as quickly as possible, and get their mortgage liability back to where it was, Rademeyer says. “Simply borrowing the extra finance and extending the period over which the mortgage has to be repaid isn’t really saving - and could actually cost you more in interest in the long run.
“In addition, you should know that there are costs associated with extending your bond, such as a valuation fee, bond registration fee and legal fees, and that if you don’t have cash to cover these but decide instead to add them to your debt, you will be paying interest on them over the life of the loan.
“And of course you should not take on any new debt or just run up your credit card balance again once you’ve consolidated all your old debt. You will already have a bigger home loan repayment and if you are unable to pay that as well as a new credit card instalment, for example, you will literally be putting the roof over your head at risk.”
What borrowers should rather do, he says, is take all the money they have been paying off other debts every month and add it to their new mortgage repayment, in order to quickly reduce the capital balance of the loan again. “In this way they might even end up paying their home loan off faster than anticipated and saving themselves many thousands of rand in interest.”
And before they even consider consolidating, he adds, they should establish what interest rate they would be charged on their increased bond amount as this could make all the difference to the viability of their plan – and they should preferably seek help from a reputable mortgage originator such as BetterLife Home Loans that will negotiate on their behalf to ensure they get the best loan option to suit their particular financial circumstances.