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By Andrea Tucker, Director of MortgageMe

Being wary of taking on debt is a wise default position. Borrowing cash to fund unnecessary extravagances will probably only buy you more worries in the long term. Of course, there is also a good side to debt, and it can be a big benefit to you if used appropriately.

Should I refinance my home?

Refinancing your home is worth considering if you have an existing bond on your home and need access to cash fairly urgently or want to consolidate other high interest-bearing debt. Managed correctly, you can reduce your monthly expenditure and improve your overall financial situation.

Another reason you might want to consider refinancing your home is to obtain a new mortgage for your property based upon its current (new) value, and not on the amount your purchased if for. This scenario assumes you’ve been diligently paying off your home for three to five years during which time it has increased in value. This means you have created equity on your property by making regular repayments over a period of time and can reap even more benefit because your home has increased in value. Let’s take a look at some numbers to get a clearer picture of how this would work: Let’s say you still have R200,000 left to pay on your property, but the property is newly valued at R900,000 – you have created ‘equity’ to the value of the difference of R700,000. You can use a portion of this to consolidate other debt.

Before you take the plunge:

  • Refinancing your home means you must reapply for credit which means your credit history and affordability will be taken into account. There might also be new bond registration costs for which you are responsible.
  • Refinancing your home is a good option if you plan on making big improvements to increase its value even further. The good news is you can also shop around for the best interest rate as you don’t have to use your current bank or lender.

What about a secured personal loan?

If you’re in the very fortunate position of having paid off your bond, then you would be able to use your property as an asset to take out a secured loan against. A secured loan requires you to have an asset (in this case, your property) which is used as collateral for the loan until it is paid off. These loans are traditionally less risky, as the lender can take ownership of the asset if you default on your payments, and rates are set accordingly when making offers.

Before you take the plunge:

  • The lender doesn’t take possession of the asset over the duration of the loan which means you can still live in your house.
  • The stakes are much higher if you run into problems and default on payments as you could lose your home.