A number of South Africans have decided to withdraw from their retirement fund in order to settle other, higher-interest debts.
Should you then also use your home loan equity to help pay off large amounts of debt that have a higher interest rate?
The answer to this question is complex, according to Adrian Goslett, the Chief Executive Officer (CEO) of Re/Max Southern Africa.
He said that the key to making a smart decision lies in understanding when and how to use home equity effectively.
“The recent interest rate cut could further entice homeowners’ decision to access the equity in their home loan to pay off other debts,” Goslett said.
“Even without the recent cut, loans such as credit card balances and car finance typically come with much higher interest rates than home loans,” he added.
The property expert said that with the recent drop in interest rates, the gap between the cost of servicing home loan debt and other high-interest debt, like credit cards or car loans, has grown wider.
It is due to this reason that tapping into your home equity may seem even more attractive as the potential savings on monthly payments grow.
Goslett, however, said that before leveraging your home equity to settle these debts, you need to consider that if you fall behind on your home loan repayments due to this decision, you run the risk of losing the property.
“When homeowners use the access bond facility to cover substantial expenses like a vehicle purchase, they need to be mindful that, while the interest on a home loan is lower, the repayment term could be significantly longer,” he explained.
“If you are early into your bond term, you could end up paying more in interest over the lifetime of the loan.”
“Unless your bond is nearing the end of its term, using it to pay off a shorter-term debt like a car loan could extend the repayment period, resulting in higher total interest costs. If you do decide to go ahead, then be sure to pay back the loan amount over five years rather than 10 or 20 years,” Goslett advised.
Lastly he emphasised that homeowners should be aware that tapping into home equity to pay off debt is a major financial decision that should not be taken lightly.
A great tip to pay off your bond quicker
Bradd Bendall, National Head of Sales at BetterBond has also provided some tips to help homeowners pay off their bonds much faster.
“Paying more on your monthly bond amount could significantly impact the amount of interest payable over the loan period. Anything extra that is paid into your bond will reduce the balance, and the interest payable over the loan repayment period,” he advised.
For example:
The monthly repayments on a R2 million bond, at a prime lending rate of 11.75% before the September cut would be R21,674.
If you continue to pay this amount, at the current prime lending rate of 11.5%, which means paying R345 extra each month on your bond, you can save R217,171 in interest over the loan period.
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