Here’s what you need to know
Many homeowners consider tapping into their home loan equity to settle other, higher-interest debts. While this can be a financially savvy move in certain circumstances, it also carries significant risks. The key to making a smart decision lies in understanding when and how to use home equity effectively.
The recent interest rate cut could further entice homeowners’ decision to access the equity in their home loan to pay off other debts. Even without the recent cut, loans such as credit card balances and car finance typically come with much higher interest rates than home loans. With the lower interest rate, the gap between the cost of servicing home loan debt and other high-interest debt, such as credit cards or car loans, widens. This might make tapping into home equity seem even more attractive as the potential savings on monthly payments grow.
However, before leveraging your home equity to settle these debts, Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, reminds homeowners to consider that “if you fall behind on your home loan repayments due to this decision, you run the risk of losing the property,” Goslett cautions.
He also highlights that when homeowners use the access bond facility to cover substantial expenses like a vehicle purchase, they need to be mindful that, while the interest on a home loan is lower, the repayment term could be significantly longer. If you are early into your bond term, you could end up paying more in interest over the lifetime of the loan.
“Unless your bond is nearing the end of its term, using it to pay off a shorter-term debt like a car loan could extend the repayment period, resulting in higher total interest costs. If you do decide to go ahead, then be sure to pay back the loan amount over five years rather than ten or twenty years,” Goslett adds.
Ultimately, tapping into home equity to pay off debt is a major financial decision that should not be taken lightly. Goslett advises homeowners to consult a financial advisor to assess whether this is the best strategy for their circumstances.
Article courtesy of property24