Finance

Debt Clever

WORDS: MARANA BRAND • IMAGES: SHUTTERSTOCK

When home loan interest rates fall as much as they have this year, homeowners often think about using their home loans to consolidate debt and enjoy the convenience of making only one repayment a month, while freeing up cash to help them through the tough times.

A reason to consolidate smaller loans – like credit card debt, store cards, and car finance – into one larger loan, like your home loan, is usually to reduce your monthly debt repayment thanks to a lower average interest rate, and hence improve your cash flow.  So if you’re battling to afford the monthly repayments on your debt, this can be a practical solution to avoid repossession or an adverse credit rating.

Your credit card debt, for example, could have an interest rate of more than 18% compared with 7.25% on your home loan. If you consolidate all your debts under your home loan, instead of paying off your credit card at a rate of 18% or more, you’ll be paying it off at 7.25%, saving you money. Makes sense, doesn’t it?

So, why not?

However, benefitting from debt consolidation requires financial discipline, without which it can actually make your financial situation worse.  “Anyone planning this sort of consolidation needs to make sure that they first have a solid repayment plan in place,” says Gerhard Kotzé, MD, RealNet estate agency group.

The catch is that home loans are calculated over a much longer period than short-term loans such as credit and store cards, so it’s imperative that you try to maintain the instalment you were making prior to moving the debt to your home loan to pay it off over the same time period.

If you pay the short-term loan balance off over the full life of the home loan – often 20 years or more – it’ll end up costing you a lot more in interest.

The stats

The latest statistics available from the National Credit Regulator (NCR) show that there were 25,2 million credit active consumers in SA at the start of this year, 10,7 million (42,4%) of whom had “impaired” credit records due to accounts being more than three months in arrears, adverse listings or debt judgments against them. Suffice it to say, things are much worse a few months down the Covid-19 line…

The NCR figures indicate the types of accounts credit active consumers had at the start of the year and the average owed. For car finance it was R285,000; R12,000 for furniture; for overdrafts the amount was R32,000; for credit cards R22,000; R3,000 for store cards; and the average personal loan amount owed was R42,000. Most of the consumers had at least two of the above categories of debt.

“At the current home loan base rate homeowners who have enough equity built up in their property to immediately settle a R42,000 personal loan, a R22,000 credit card balance and a R3,000 store card balance, for example, are currently looking at adding only about R530 to their monthly bond repayment, compared to paying about R1,800 a month for the usual instalments on those debts,” Kotzé says.

Proceed with caution

He cautions, however, that homeowners who do this will only gain a real advantage if they keep their remaining home-loan term the same as before, and if they use some of the money they save on the other instalments to pay off an additional amount on their bond every month.

If they can divert at least half of what they’re saving on other instalments to increase their home loan repayments every month, they could end up paying that loan off much sooner than expected – and saving many thousands of rands in interest.

“In short, there can be significant benefits for homeowners to consolidate debt, but there are also serious potential pitfalls, and our advice is always to first seek proper advice from bankers or a reputable mortgage originator.

“In tough economic times, it’s especially important not to put your home at risk by increasing your repayments to unaffordable levels,” says Kotzé.

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