WeeklySA_AdminCAUTIONARY NOTE: The key to using this facility correctly is having a strong repayment plan…
By Isaac Moledi
Do you have many unpaid bills lying unopened on your desk? Are you finding it difficult and worrying trying to pay off all your debt? Have all your bills piled up until you find it quite difficult to pay them off using your monthly income?
If the answer is yes to most or all of these questions and many others, maybe this is the right time to think of consolidating your debts using a second bond.
Old Mutual statistics conducted during the Covid pandemic show that at least 33% of South Africans are struggling to meet payments on credit cards and shop accounts; 37% of those interviewed say they are behind on everyday household bills. In addition to overspending, at least 35% of home owners have applied for a payment holiday on their bonds because of the Covid pandemic.
John Manyike, head of financial education at Old Mutual Limited, believes that consolidating debt enables hard-pressed consumers to cope with these demands. It helps because all identified debts can be combined into a single account.
The benefits are:
• All debts are settled by the financial institution into a single account.
• The overall debt is reduced, as interest on in dividual accounts no longer accrues. This can mean significant savings as some accounts attract 21% interest or more on arrears.
• A single payment, instead of many, makes money management simpler.
• Closing accounts as they are combined means no further debts are created.
A major negative impact of this method for consumers, Manyike says, is that debt consolidation could release some disposable income to the consumer so he or she can continue to spend. This can rapidly lead to further indebtedness.
He says making debt consolidation work means becoming financially disciplined and strictly keeping to the budget. He says most financial institutions will ordinarily consider assisting with debt consolidation loans.
The first port of call, of course, should be the bank where the consumer is a customer, since the bank would have a financial picture of the consumer’s day-to-day financial dealings and their creditworthiness.
Using a second bond to consolidate debt, although popular among indebted individuals, must be carefully considered. He believes this option is only open to people who have built up equity on their home loans. Equity regarding a home loan is the difference between the amount owed on a home and the actual value of the home.
For example, if you owe R1 000 000 on a home loan, but the home’s value has risen to R1 500 000, the extra R500 000 is equity that can be accessed if you refinance your bond. The most obvious benefit is that home loan rates (presently about 7.25%) are usually significantly lower than personal, car, and other loans rates. This means that savings are made when the original loans are paid off, and benefits for settling before the due date are calculated.
Financial advisors say some homeowners choose to consolidate their debt by withdrawing a lump sum from their refinanced home loan, settling their accounts, and leaving the repayment of the now-larger home loan as their main monthly expense.
In a recently quoted example, settling a R 67 000 debt drawn from a loan, credit card, and retail account will result in about R 530 being added to a bond payment, instead of the R 1 800 required if usual monthly payments were made. The key to using this facility correctly is having a strong repayment plan in place, advisors say.
Manyike believes, however, that “long-term funds should never be used to cover short-term debts”. This is because if a plan is not made to pay off a debt in as short a time as possible, a short-term loan (say a five-year car loan) could be integrated into a bond and paid off in the term outstanding on the bond. For example, the car could then be paid off in 15 years, making it more expensive than through a traditional loan.
He believes that homeowners consolidating debt on bonds gain significantly only when the home-loan term does not change, and the money saved on other instalments is paid into the bond.
This shortens the life of the bond and reduces interest payments on the home loan. The downside, however, is that the value of a home, particularly when demand is low, can also depreciate, and if a second bond is taken out, this could lead to a situation of negative equity. In other words, you owe more than the house is worth on the market.
Costs of applying for bond refinancing with a second bond. Remember, debt consolidation using a second bond means that you are using your house as collateral, so if you fail to pay the refinanced bond, you may, in addition to the debts you are owing, also lose your home. Usually, the financial institution involved will insist that the home be revalued. In this process, an applicant’s credit history and affordability for the additional finance will be reviewed.
If you are applying for a second bond, the funds will be payable after the bond is registered at the Deeds Office, which could take up to six weeks. Costs included in the refinancing deal will be for the registration of a second bond, VAT, and a Deeds Office levy.
For example, registering a loan of R1 000 000 for the second bond would be approximately R29 778, which needs to considered against the benefit of re-financing.
