Don't treat your home like an ATM

The content of this article was originally published on the MortgageMax's website. The information and views set out in the article are those of the author(s)

For homeowners who are really struggling to make ends meet, it may seem like a very good idea to "borrow" some money from your access bond to help pay the bills - or even to "consolidate" all your debts into your home loan account.

Whenever money is tight, we see an increase in what the banks call "further advances" - which is when homeowners re-borrow all or part of the amount they have already paid off their bond to finance or pay off something else - like a credit card balance or car loan they want to get rid of.

However, deciding to use the home equity you have taken years to build up to clear short-term debts is really not something you should do impulsively, as it has many possible implications that could drastically affect your financial future.

For a start, pulling cash out of your bond account to pay off other debts will push up your monthly bond repayments, and could put your most important asset at risk if you cannot afford the new instalments. It's bad enough to miss car payments or credit card instalments, because that dents your credit record and could result in the car being repossessed and/ or debt judgments being taken against you.

But if you can't manage the higher monthly repayments on your newly-enlarged bond, you could lose your home. In fact, we believe that debt consolidation using a home as security should only be considered by extremely disciplined borrowers who have the means and a plan to pay back all of the equity they have extracted within a very short period - so that they don't end up paying a huge amount of extra interest on their bond.

In addition, you need to know that there are substantial costs associated with extending a 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 also add them to your home loan account, you could end up paying interest on them over the whole life of the loan.

Also, you should be prepared to not take on any new debt commitments and not use your credit card after consolidation, so that you don't risk getting into deeper debt trouble than before, with a bigger monthly bond instalment to pay plus the repayments on the new debt. You can't just keep using your home as an ATM.

If you do decide to consolidate your debt, your best plan is to take the total of whatever you were paying off all your other debts every month (or as much as possible of this amount) and add it to your new bond repayment in order to quickly reduce the capital balance of the loan and rebuild your home equity.

In fact, doing this might even result in you paying off your bond faster than originally anticipated - and saving yourself many thousands of rand in interest.

But before you even consider consolidating, you must establish what interest rate you would be charged on the new bond total. This may not be the same as you are being charged now, and that could make all the difference to the viability of your debt reduction plan. To find out, you should preferably seek help from a reputable mortgage originator such as MortgageMax, which will negotiate on your behalf to ensure you get the best interest rate possible.

At the moment, we are finding that the average variation between the best and worst interest rate offered on a bond application is 0,5%, which could translate into very significant savings for the borrower, at no cost for our service. On a loan of R1,5m, for example, the potential savings amount to more than R120 000 worth of interest over the lifetime of a 20-year loan, plus a total of about R6000 a year off your bond instalments.