More homeowners choose to ease pain with debt consolidation
As banks tighten their lending criteria‚ more homeowners are choosing to consolidate debts into their home loans — but that could spell trouble down the road for South Africans who are not careful about their personal finances.
The costly credit environment is resulting in people taking further advances on their home loans in order to pay off other debt‚ resulting in smaller monthly costs‚ but a total cost of potentially multiple times more.
In the past three months, there had been an uptick in further advances on bonds — when a consumer borrows against what has already been paid off on a home‚ usually in order to pay off other‚ short-term debt, said Shaun Rademeyer‚ CEO of BetterLife‚ which offers home loans.
In March alone‚ BetterLife recorded an increase of more than 48% compared with January and February. Compared with March 2016‚ BetterLife recorded an increase of more than 20% in total value of further advances approved.
SA Home Loans‚ another large mortgage finance provider‚ has also seen a "marked increase" in clients looking to consolidate their debt‚ said Guy Saville‚ an executive at the company.
The temptation for consumers is lower monthly payments. Borrowing against the equity of your house is one way to lower month-to-month costs. But in the long run it can potentially cost more.
"You pay off your bond in 20 years and your car in seven years‚" Rademeyer said. "If you are going to consolidate‚ you need to look at what the future cost will be."
For some consumers‚ consolidation into a home loan is a measure of last resort to increase month-to-month cash flow‚ so an increase in such activity could be indicative of more South Africans living larger than their means.
While paying only one debt each month instead of multiple was appealing‚ running into trouble paying off a house was more serious than getting a car repossessed‚ Rademeyer warned.
"If you default on other debts, it can result in your car being repossessed‚ or a judgment being taken against you‚ which is bad enough. But if you are unable to make the repayments on your enlarged home loan‚ you could lose your home."
Absa’s chief risk officer for mortgages‚ Ewald Kellerman‚ said that although the first quarter normally showed an increase in the number of further advance applications‚ his bank had seen the value of further loans increase faster in 2017 than the rate of new purchases.
Kellerman said the reason customers applied for further advances varied‚ but included paying school fees‚ funding renovations and using the equity to purchase an investment or holiday home.
However‚ Rademeyer warned that it took financial discipline to make further advances pay off.
"Human nature is ‘if it’s available‚ use it’‚" he said. "But if you are going to consolidate into a home loan‚ you need to make sure you don’t expend that debt again. Don’t use your credit card‚ close it."