Consolidating debts into the mortgage bond gives significant savings

With the news media increasingly publishing advice on how to survive lean economic times and with the average South African’s disposable income now 16% lower (in real terms) than it was in 2007, it was interesting recently to hear Bill Rawson, Chairman of the Rawson Property Group, advocating a particular piece of advice to those struggling to balance their finances — a consolidation of debt into one single mortgage account.

“This tactic is one which many shrewd people, particularly the younger management sect, have been adopting over the last decade.  Instead of paying huge interest rates on hire purchase items, such as cars, and on personal loans, e.g. for home improvements, they put all their debt into a single bond paying it off in most cases by means of monthly debit orders.  This, of course, means that their interest rates are limited to around 9% or 10%.”

This system, operating on such a low interest rate charged, does give significant savings without any need for the payment period of the bond to be increased. 

It can, said Rawson, be displeasing to the banks to be unable to charge the 15% to 22% rates that they achieve on short term loans.  If they do refuse to consolidate loans into the bond account, it is, he reminded borrowers, always possible to change banks.

Rawson said that like most other property investors, he does now foresee interest rates rising — but relatively slowly — as the global economy enters its recovery phase. The signs that this recovery will gain pace are, he said, increasingly encouraging.

“In these circumstances,”  said Rawson, “if one is buying or building a home, it is essential to factor in a possible 11% mortgage rate for the next two or three years.  This may not come about, but it would be unwise not to allow for such an increase.”

“If the borrower’s resources are likely to be stretched uncomfortably by the higher rate, my advice would be for them to lower their purchase ambitions.  Bearing in mind that homes usually take ten to 20 years to be paid, it is wise to allow for fairly significant interest rate increases in the future, and to pay one or two percent above the going rate.

At the same time, he said, this is not the right time to be ultra-cautious.

“At this stage in our economic cycle, residential property is increasing in value at an average growth rate of around 9%.  This means that if the buyer acts with too much caution, he is likely to find himself buying in the future at far higher prices.”

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