Don't squander your home equity

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

"At the start of the year we always 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 something else," says Rudi Botha, CEO of BetterBond*, SA's leading bond originator.

"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, he says, pulling cash out of your bond 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 these. "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, says Botha, borrowers need to know that there are 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 add them to your debt, you will be paying interest on them over the 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."

What borrowers should rather do, he says, is take the total of whatever they were paying off all their other debts every month (or as much as possible of this amount) and add it to their new bond repayment in order to quickly reduce the capital balance of the loan and rebuild their equity.

"In fact, doing this might even result in them paying off their bond faster than originally anticipated - and saving themselves many thousands of rand in interest."

But before they even consider consolidating, he adds, borrowers must establish what interest rate they will be charged on the new bond total. "This could make all the difference to the viability of their debt reduction plan - and they should preferably seek help from a reputable mortgage originator such as BetterBond, which will negotiate on their behalf to ensure they 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."

*BetterBond currently accounts for more than 25% of all new mortgage bonds registered in the Deeds Office annually and its statistics are a reliable indicator of the state of South Africa's residential property market.