Your home loan is not an ATM

2017-08-01 15:14

Your home loan is usually the cheapest form of debt and, financially, it could make sense for you to use this relatively inexpensive credit line to pay off other debts such as your car or credit card, but this may not be a good idea.

The first mistake people make is that, rather than saving on interest, they end up paying even more because, rather than paying off the debt over a few years, they in effect extend the debt repayment over 20 years.

For example, if you bought a car for R250 000 and your car was financed with an interest rate of 15% a year, you would pay about R6 000 a month for five years, which means the car would cost you R360 000 including the interest.

If you decided to finance the car using your mortgage with a 10.5% interest rate, your monthly repayment would fall to R5 400. Over the five-year period, you would pay R324 000 – a saving in interest of R36 000. However, this would mean you’d have to increase your monthly mortgage payment by R5 400 to ensure that you were still paying off your car over five years.

Many people continue to only pay the minimum monthly instalment on their home loan, which would in effect extend the car payment to more than 20 years.

In this example, if you took the R250 000 from your mortgage, your minimum monthly repayment would increase by R2 500. You may think that this is a big saving because your monthly car payment falls from R6 000 a month to R2 500 – and this is the mistake people make. They look at the monthly affordability rather than the fact that, over 20 years, that R250 000 will cost a huge R600 000.

The same applies to any short-term debt, such as credit cards or personal loans. If you settle your R20 000 credit card debt by drawing money from your home loan and not increasing your repayment, that R20 000 will end up costing R48 000.

Also remember that if you continuously use your mortgage as an ATM machine, you may still owe money on your home by the time you retire.

Considering that most people will experience a drop in income of between 25% and 75%, you may struggle to continue to meet those mortgage payments and possibly lose your home in retirement.

Your mortgage may look like an attractive way to consolidate your debt, but it won’t be if it’s not used responsibly.

Maya Fisher-French
Personal finance journalist
City Press
p:0117139001  e:
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February 25 2018