Consolidating household debts into home loan is a risky business


Experts have warned that while it is tempting to try and consolidate all of your debts into your home home loan, homeowners should try to err on the side of caution when doing so.

The current economic environment has not been easy for South Africans to negotiate, and it is estimated that some household debts are in the region of 75 percent. However, the Chief Executive at BetterLife Home Loans Shaun Rademeyer said the decision making process was not straight forward, by any stretch of the imagination.

He warns that it is a decision that should never be taken lightly.

“We have seen an increase recently in applications for what the banks call ‘further advances’ – which is when the home owner re-borrows all or part of the amount he has already paid off his home loan to finance something else,” Rademeyer told SABreaking News.

“Usually the motivation to do this is to pay for additions and alternations, or pay for a child’s tertiary education, but currently the strongest reason being given for further advances is to use the money to pay off other debts and consolidate all borrowings into the home loan account, at a relatively low rate of interest compared to a credit card balance, for example, or car finance,” added Rademeyer.

He explained that risks involved in adopting this route were too high, adding that homeowners stand to loose too much.

“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,” said Rademeyer.

“Another problem we see is when people who take out further advances for debt consolidation continue to overspend, and before long find themselves in deeper credit trouble than before. Now they have a bigger home loan plus a new credit card balance to pay off.”

Rademeyer warns that this route should only be adopted by those who know they are fiscally disciplined and are fully committed to debt reduction. otherwise, you are just setting yourself up for a trap, which is exceedingly difficult to climb out of.

“There’s really no point in starting a debt consolidation programme unless you set goals that you can achieve and you can live with the steps you need to take to achieve them.

“For a start you need to avoid financing certain items over the full 20-year lifespan of your re-enlarged loan. For example, the repayments on a car usually only last for a maximum of five or six years, so you need to ensure that any car finance amount that you have consolidated into your loan is repaid within the same period of time – or you could end up paying interest over 20 years on a car you don’t even own anymore. In fact, you should aim to pay off the whole additional amount borrowed as a further advance as quickly as possible, and get your home loan liability back to where it was. Simply borrowing the extra and extending the period over which the bond has to be repaid does not represent a real saving – and could actually cost you more in interest in the long run.”