Refinancing my home vs a secured personal loan: which will work best for me?

Should I refinance my home or take out a secured personal loan instead?

Be wary of taking on debt. 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.

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

Another reason for considering refinancing your home is to obtain a new mortgage for your property based upon its current (new) value and not on the amount you purchased it for. This scenario assumes you have 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 time and you can reap even more benefit because your home has increased in value.

Looking at some numbers to obtain 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 has been newly valued at R900 000 – you have created ‘equity’ to the value of the difference of R700 000 and you can use a portion of this to consolidate other debt.

But before you go ahead, refinancing your home means you must reapply for credit which means your credit history and affordability will be considered. There might also be new bond registration costs for which you are responsible. This is a good option if you plan on making big improvements to increase its value even further. The good news is that you can also shop around for the best interest rate as you do not have to use your current bank or lender.

If you are in the 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 it. 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.

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

By Andrea Tucker, Director of MortgageMe

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