Consolidate debt into a home loan

Mr Simpson was asking about consolidating all his debt into his property to take advantage of the lower interest rate of his home loan.

He has a house worth R1 200 000 on which he owes R400 000. He had taken the home loan many years ago when he paid around R 600 000 for the property and at the time he qualified for a good interest rate at prime less one percent. Since then he has had a number of other expenses, some unforeseen and others just too large to deal with on his month to month salary, and therefore he has had to take a number of loans to cover these. He has store cards of around R20 000, a few credit cards totalling around R50 000 and a personal loan of R90 000 he is paying over three years which was meant to cover his daughter’s study fees.

He is paying around R5700 per month to his house and about R9500 per month to all his other debt. There are two ways to give him more money to live on. The first is by applying for a larger home loan and settling all the other debt. It would lower his monthly payment considerably, but there are a number of things he would have to keep in mind. Firstly, he would essentially be paying that unsecured debt over a very long period, and even though the interest is reduced dramatically, it would still have a negative impact on his estate. As an example, if Mr Simpson was married, and something had to happen to him during the period he was paying the debt, it would severely affect the inheritance he would leave behind considering that the property would now be surety for the debt. Unsecured debt should ideally be kept unsecured so as not to affect one’s nett worth or estate at any point.

The second solution might be through a debt counselling process. Debt counselling is designed to get rid of the unsecured debt leaving Mr Simpson with only his home loan to pay. Credit providers often agree to interest rates similar to secured debt when they see that a consumer is facing financial hardship, and by keeping this debt separate to the home loan, Mr Simpson could be rid of his nsecured debt in under five years. If he is left just with the original home loan to pay, he should be able to manage perfectly well, and can then go off debt review. This solution also retains the credit life insurance on his unsecured debt, so should anything happen to him during the period, his estate would not suffer.

Consolidate debt into one payment

Although many people turn to debt consolidation as a means to reduce what they are paying, consumers should be aware what they are signing up for. People often attempt to roll shorter term debt like credit cards and store cards into a longer term loan in order to reduce the monthly payment. What they are in fact doing often carries a double penalty. Firstly, a typical 5 year consolidation loan would result in consumers paying far more than double the original loan amount when adding the fees and interest. Often one can see that after credit life insurances and monthly fees are added, one could typically pay back R260 000 on a R100 000 loan. Taking that same example of the R100 000 loan, with a monthly instalment of around R4300, only R680 would come off the capital sum. The rest would all go to interest and fees in month one.

The reason for this leads me to the second penalty consumers face with consolidation loans. Credit cards, overdrafts and store cards are called Credit Facilities in the act. It really means that one can pay back and use the funds as one sees fit and can keep the facility open. This is in contrast with a Credit Agreement like a fixed term loan. In terms of regulations, Credit Providers can charge ten percent more in interest for Credit Agreements that Credit Transactions. Consumers are therefore often exchanging cheaper credit facilities for more expensive agreements only because the monthly instalment is less. One could use the analogy and say “would you still borrow from Peter to pay Paul if Peter was charging you more in interest?”

Debt Counselling or Debt Review can also consolidate your debt into one payment but it will reduce the interest. It is always advisable to look carefully at all the options before committing to such big decisions.