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The Pitfalls of Debt Consolidation
and Avoiding them
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Pay Early & Multiple
Payments
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If you do decide to
consolidate your debt into your
bond, you should next try to
repay your loan as soon as
possible to maximize savings.
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Interest is calculated on a
daily basis and if your bond
payment is due the 30th
of every month, make your bond
payments five days earlier each
month and save in the long term
or split your payment amount
between the 15th and
the 30th and you save
even more. If you make your bond
at the 15th instead
of at the 30th, you
are saving 15 days worth of
interest.
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Maintain your original
payments even if the interest
rate drops. This way you can pay
off your bond in record time and
save on interest, without any
affect on your current budget.
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Up the Repayments of
your home loan. By paying more
into your mortgage loan you can
gain significant savings on
interest and reduce the term of
the home loan. For example: if
you should increase your
payments with an extra R400 per
month on a bond of R400 000, you
can reduce your bond term with
up to 5 years.
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Depending on your financial
circumstances and what you can
afford to pay into your home
loan, a 20-year agreement could
turn into full ownership within
few years by cutting monthly
living costs, saving on interest
costs and increasing the amount
that you get out should you ever
consider to sell.
Borrow Wisely
- Expensive debt is a quick way
to lose money.
- Most mortgage bonds enable you
to repay more than your set
repayments and to borrow against
what you have paid.
- This is useful not only to
borrow money for other things at
short notice, but also to use as
a savings account.
- The effective interest you
receive is much greater and
there are no additional costs.
Say, for instance, you need to
put away money to pay school
fees or provisional tax.
“Save” the money in your
mortgage bond until you need it,
rather than in a low-interest
bank savings account.
- Link your cheque and bond
account. Pay your salary into
your cheque account and since
interest in calculated daily,
this will reduce your loan
amount and hence the interest
you will pay.
- Deposit your bonus into your
bond and you will be surprised
at the amounts you will be
saving. If you pay for example a
lump sum of R40 000 at the end
of the first year on a bond of
R500 000 @ 12% you can reduce
your bond repayments with almost
7 years!
Manage Your Mortgage
- Ensure that your pay your bond
on a regular basis. Do not miss
any payments since this will
increase your interest
liability. Arrears are costly
and should be avoided at all
times.
- If you decide to cancel your
bond study your loan contract
and see if contains any penalty
fees. If it does give at least 3
month’s notice. Some
institutions can charge you a
penalty fee that is equal to
three months interest.
- Think carefully before you
decide to make use of interest
only home loans. Although this
will be affordable in the short
term, contemplate the effect
this will have on you and your
family over the long term.
- Interest rates been on the
rise steadily, which will result
in your interest payments being
more that before. You could end
up in a worse financial position
than before.
- Additionally you will remain
in debt for much longer by
delaying the repayment of the
capital debt.
- Remember there is nothing like
a free holiday. Some
institutions are offering
payment holidays when you
register a new mortgage bond
with them. You can delay the
payment of your first
installment up to a certain
number of days. In the mean time
you are accumulating extra days
of interest
- Always make use of the
services of a bond broker to
help you avoid any potential
pitfalls.
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