How to use your bond as a financial resource

How to use your bond as a financial resource

Home loan interest rates - currently at 10.5 percent - are at their lowest level in years. But many consumers don't know how to tap this financial resource and are wasting money using expensive credit facilities.

Saul Geffen, MD of leading originator MortgageSA says, "Interest charges on traditional sources of credit like overdraft facilities and credit cards are crippling for South African consumers, many of whom are fighting an ongoing battle to escape from the debt trap.

"As many people have found to their cost, succumbing to the lure of the 'buy now, pay later' philosophy can result in the battle to pay balances on cards and other credit facilities.

Geffen says that one way to regain control of your finances is to consolidate all your existing debts in your mortgage bond account.

"By borrowing funds from your access bond account to pay off all higher interest accounts, you will in effect be moving your accumulated debts into a single account that offers much lower interest charges.

"If consumers tally up the total interest charges on all their debts both before and after consolidating these debts in their home loan account, they will see the accelerated reduction effect of using this financial option."

However, Geffen points out that it is vital for consumers who opt to consolidate their debt through their bond account to bear in mind that, while this financial option will enable them to pay their debts with less interest overall, their monthly bond payments will increase accordingly and they will pay more over the long term.

"It is also important for consumers to note the need to curb future spending in order to manage their debt effectively, as they should not continue to borrow against their bond.

"Owning a property provides significant financial stability and is one of the best means to accumulate long-term wealth. Accessing this capital in the short term has a corrosive effect and home owners may find the gain from their most significant asset devalue down the line."

Geffen warns that consolidating your debts under the mortgage bond requires strict financial discipline and is not suited to all people.

Before consumers take the step of consolidating their debts in a home loan account, Geffen again advises them to 'stress test' their budgets, as well as their financial accounts. This will ensure that they are not over-extending themselves financially and will still be able to meet their bond repayments should interest rates rise

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Financial freedom doesn't mean you have to win the lottery or a get an unexpected call from the executors of a long lost uncle's estate in Provence.

R 20 million for a three bedroom apartment in Cape Town's V&A waterfront may seem like a ridiculous sum to pay by South African standards, but it compares favorably with Sydney and remains significantly cheaper than upmarket apartments in other international playgrounds.

MortgageSA, South Africa's leading mortgage originator placing one in five mortgages, said that the possibility of a fixed mortgage system, currently being discussed by the Reserve Bank, could be a double-edged sword for consumers.

With stock markets in seesaw mode, the stability of property as an investment asset class has once again come to the fore. "House prices are expected to increase by 12% this year and while this may not be as high as in recent years, it still represents a good return" says Saul Geffen, Chief Executive of leading mortgage originator, MortgageSA.

As interest rates rise, homeowners have an even bigger incentive to invest in their bonds, as they will be saving even more interest while benefiting from the secondary advantage of a shorter term of repayment.