Don’t fall in the Credit Trap and Lose your Home through an auction
We all want things we cannot afford. How do we get it if we do not have the money right now? We purchase it on credit. And with credit comes interest and admin costs. The usual items most people purchase on credit include, clothing on account, a car on higher purchase, or a home through a mortgage loan. This is all good and well. Who wants to wait six months to purchase that expensive jacket for a party, or save up for four years to drive a nice car? The last thing you want is your home to be in the local paper, up for auction. If you can afford the monthly repayment amounts comfortably, go for it.
As they say, life is short. However, getting yourself into debt can also set yourself up for a very unhappy life if you cannot afford to pay it back (with interest). But what are the actual consequences of not paying your debts? And in this article, we answer that question when dealing with mortgage bonds.
In today’s economic climate, it has become harder than ever to purchase immovable property. This is so as most times it is done through the banks or credible financial institutions. With the National Credit Act as a watch dog, banks and loaning companies must be pretty confident that you would be able to repay the mortgage loan. In other words, reckless lending is to be avoided. Should a lender practice reckless lending, not only will they lose out, but more so, the borrower, you.
Let us use a practical example. You purchase a home for, let’s say, R 500 000 – 00. The bank then forecloses due to default on payments. Your home would be sold at a public auction. The auction price would most likely be less than the initial purchase sum. One must also consider the fact that when purchasing a house, there are additional costs. They include, conveyancing attorney, bond attorney, transfer duty and other costs that had to be paid over and above the purchase price. Of course, the bank should first comply with the provisions of the National Credit Act before foreclosing. They first need to send notices, advising you of debt review and so on. But the bottom line is, if you cannot repay your debt as per the mortgage agreement, your property is more likely to be sold in execution.
Cost of losing your home
Turning to the practical example above, of purchasing a home for R 500 000 – 00, the possibility of the bank selling your home at a force sale at a profit to you, is very slim. The bank should first obtain the R 500 000 – 00 it borrowed you. There were further legal and tax expenses you incurred. Here we refer to transfer duty, attorney costs, penalties etc. Then there are the added costs of court fees, auction, and sheriff costs. Seeing that you were at default, you would more than likely be ordered to pay it.
And now the bitter part. Let’s say you are lucky to have your home sold at a public auction for R 450 000 – 00. In this case, you would still be responsible to the bank for the balance of R 50 000 – 00 and other moneys your borrowed from the bank (e.g. conveyancing attorney costs, transfer duty etc). Why so? They did not only borrow you the purchase price. They borrowed you much more. The funds were used to pay for those additional costs above which this article keeps mentioning.
Some financial advice
Before purchasing a home with the assistance of a financial institution, make sure that you can afford it. You are taking on a 20-year commitment. If for whatever reason, you feel that with inflation, the rise in size of your family and so on, you would struggle to pay your monthly installments on time, it would be best to find a cheaper place or wait until the tide changes. If things go bad, it may not only be you that is affected. Your family as well as your credit profile will suffer the consequences.
As you can see from the above, the costs associated with losing your home is huge. Therefore, sound decisions, based on practical advice is always important. Save where you can, and be money smart. Remember, the best things in life, money cannot buy. But lastly, cash is king and a penny saved, is a penny earned.
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