ERA SA chief warns against over borrowing

Debt consolidation is the name of the consumer game right now. It's about putting all your debt bad eggs in one financial basket and calling it by another name, or rather by another monthly cost.

And this makes sense in today's live-for-today society where not too much attention is paid to building a nest egg for the future and where it's all about leveraging your income to the maximum, says Gerhard Kotzé, CEO of the ERA South Africa property group.

"As a with it, upwardly mobile young person with portable skills, it's downright uncool to have a fuddy-duddy pension or provident fund - or worry about ending up at an advanced age with few assets, large debts and diminishing marketability, because the belief is that can all be taken care of by investing in property.

"But while property is of course a fine investment, any financial advisor worth his salt will also tell you it's advisable to have a diversified investment portfolio, classically one third in property, one third in long-term savings and one third in cash."

What is more, he notes, the property "leg" of the portfolio can easily be compromised if owners borrow too much against the value of their homes. "And worldwide, there is concern about how much consumers are borrowing using their homes as collateral - or in other words, how much of their home equity they are spending, since in many cases these properties are their only real assets."

The "trick" when you consolidate all your debt into your home loan, Kotzé says, is not to extend your overall indebtedness in the process, and to still repay any shorter-term loan - for a car, for instance - within the original loan period of three to five years.

"That way, you will derive maximum benefit from the lower interest rates applied to home loans and avoid using your home as security for depreciating assets."

"In addition," he says, "homeowners should take care not to borrow all of the equity they have available because their property has increased in value or they have paid off a major portion of their home loan. If they do and then suddenly have to sell the home for some reason, they run the risk of not having enough left after the sale to acquire a new home.

"Indeed, my own belief is that they should maintain a cushion of untouched value in their property of at least 20 percent of the current market price."
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