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23 Jul 2013

PAYING DEBT USING A HOMELOAN

Try paying debt using a homeloan if you are disciplined enough. This is the second installment on my series on Dealing with Debt which I started yesterday. I have used an existing homeloan to pay up debt. We paid Mr's car using our mortgage once. It was a great move and saved us a lot of money in interest. The best part of this move was that, we paid the original car installment into the bond and ended up paying the loan in a fraction of the time.
PAYING DEBT USING A HOMELOAN
 One amazing tool that people neglect is their homeloan. Your mortgage is likely charged at a prime lending interest rate and most likely below prime rate. Whilst other debts are above prime rate. Credit card and store cards can be above 20%, a car and personal loans closer to 20%. Remember that prime interest rate is 8.5% currently.

This is all a figures game which your bank plays too well. If you can pay below prime for your debts, why not. If you have a homeloan that you've had for a while and the value of your home has gone up, you can have the bank give you an access bond. You can even ask for a lower interest rate whilst at it. Or even change banks to get a lower rate, but that's the story for tomorrow. The bank may increase your homeloan to the current value of the house so you can access the extra cash in it. Like I said yesterday THIS IS FOR VERY DISCIPLINED PEOPLE because you are now starting another 20 years of loan.

Lets use a "paying debt using a homeloan" example:
Lets assume you owe R50000 in the combination of your debts (consumer debt, credit cards, personal loans, etc). The average rate for all of them is 20%. You pay about R2000 per month to service this debt. R500 here, R300 there, etc. At that 20% interest rate you will take about 33 months to pay all that debt (hope my spreadsheet is accurate). That's almost 3 years of parting with R2000.

An alternative is getting the access bond on your house and pay all your debt. And then, pay the R2000 extra into the homeloan. Remember that your bond payment may increase, though unlikely if you had it for a while. But you will pay the R2000 extra into the homeloan, because that's the R2000 that you would be throwing in the water anyway.

Assuming that the house is worth R500,000 at 8.5%, then your monthly installment is R4,339.12. You'll pay your mortgage in 20 years and part with a total of R1,041,388 in that period. At least your income will be increasing over time hopefully.

Now add the R2000 to the equation. Paying R2000 to your homeloan can save you more than half the interest you will pay over the term of your loan. You end up paying your homeloan in 9.5 years instead of 20. And then part with R 734,675 instead of R 1,041,388. Paying a homeloan quicker can be so sweet and effortless.

See how you can use the R2000 that you throw into the bin all these years. Debt will ALWAYS be an enemy, unless you use it to get income. What do you think of this concept of paying debt using a homeloan?

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1 comment:

  1. Mhhhhh!!!! Interesting. I never looked at it that way. I'm now calculating that one would pay even far less if s/he continues paying the exact installments initially paid for each debt into the home loan and include the R2000. I mean, if the car installment was R4000 a month, the credit card R1500, the loan R1000 with the R15000 for all the store cards that would mean paying about R10 000 (including the R2000) extra in your bond. That would surely beat the interests accumulated due to the long term of a bond. Mhhhhh!!! Wonder if I make sense. I hate English.

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