Homeowners with equity in their property can consolidate their debts. That is homeowners whose mortgage is less than the value of their house. Lenders will only lend up to 85% of the value of your property for debt consolidation, so that they have ‘security’ on the debt – your property.
However, homeowners can only increase their debt up to the level that they can afford the repayments. For example even if your house is worth R1m, the bank won’t lend you a R1m if you only earn R5,000 a month because you will not be able to afford the monthly mortgage repayments.
Since the introduction of the National Credit Act the calculation of your ‘affordability’ has become far more complex. This is due to the Act’s restriction of ‘reckless lending’ to put an onus on the lenders to only lend you what you can afford to repay. To calculate your affordability you mortgage consultant will take your Net month income, less all you monthly living expenses. The amount you are left with is the amount you can afford to use to repay debt. If you have already overstretched yourself, then once you have deducted you monthly debt repayments this figure may be negative. If this is the case, then debt consolidation could be your best alternative, by moving your debt into one more affordable monthly payment. The best way to show how debt consolidation works is to show an example as follows:
|Before Debt Consolidation||After Debt Consolidation|
|Net Monthly Income||20,000||20,000|
|Monthly Living Expenses||-6,000||-6,000|
|Credit Card Repayments||-4,000|
|Short Term Loan Repayments||-3,000|
Here all the short term debts have been transferred into the bond at a far lower interest rate and over a 20 year period, turning the clients net deficit every month into a net surplus of R7,000 per month.