Essential tips for using your bond stocks
Focusing on paying off the debt with the highest interest rate is a great financial strategy.
For this reason, many choose to use the equity in their home loan to pay off other debts with higher interest charges.
While it can be a sound financial decision, it can also be a very risky decision, knowing when and how to use home equity loan equity will make all the difference.
According to Adrian Goslett, regional director and CEO of RE / MAX of Southern Africa, auto loans and credit cards generally bear interest at a much higher rate than a home loan.
READ ALSO: Flsp supports first-time buyers
Before using home equity to cover those debts, he recommends reviewing the numbers to determine if it will put you in a better or worse financial position.
“Homeowners need to consider the long-term impact of this decision and make the necessary calculations before making a final decision.
“The last thing a homeowner wants is to fall behind on repayments and lose their home because they used their equity to cover other debts,” he said.
Whether it is safe to use equity to cover other debts depends largely on the remaining term of the mortgage.
“When homeowners use the bond’s easy accessibility to pay off an expensive item, like a car, they should consider that while the interest on a bond is usually lower, the loan term is much longer. If in the early stages of their bond term, it could essentially cause the homeowner to pay more interest over the term of their home loan, ”Goslett said.
While the interest on a car loan is generally higher than that on a bond, the loan term is much shorter. Typically, vehicles are funded for 54 months, sometimes 60 months, depending on the agreement.
In contrast, most bonds will be funded over 20 years or in some cases 30 years.
“Unless the deposit is fully repaid in five years or less, homeowners will have extended the term of the car loan, which could increase the total amount of interest paid. If the goal is to save on all of the interest paid, a lower interest rate over a much longer period is not the solution, ”Goslett said.
To give an example, BetterBond explained that if you have a 20-year home loan of R 1 million with a prime interest rate of seven percent, with 10 years remaining, an additional R 100,000 will cost an additional R 1,161 per month. months and earn an interest amount of R139,330 over the life of the loan.
However, if you take out auto finance for the same amount over 54 months at an interest rate of 12.5%, you will pay between R 2,516 and R 2,528 per month, but you will pay R 357.82 in total interest and service charge over the life of the loan. .
In this scenario, using the bond account will cost you an additional R26,565 in interest.
While the monthly repayment is reduced, the overall interest paid on the debt is twice as high.
To benefit from the lower interest rate on the bond, Goslett said owners will need to add the total monthly amount they were paying on vehicle finance to the bond repayment.
“The additional monthly payments would reduce the amount of the outstanding bond much faster, as well as the total interest paid over the life of the loan. The owners would then pay for the car in the same amount of time, but would see the positive impact of lower interest rates, ”he said.
Using the equity in a home loan to cover debt is an important decision for homeowners and should not be taken lightly.
As a final tip, Goslett said homeowners should speak with a financial advisor to find out what would work best for their unique situation.
“While the above provides a simplified example, every owner’s financial situation is different. Homeowners will have to do the math themselves to make sure they’re making the right decision in this regard, ”he said.
Also follow us on: