Taking out a home loan can be considered responsible borrowing.

Debt has a bad reputation – which it doesn’t deserve, because not all debt is created equal. Some debt can help you build a better future rather than weigh you down. Home loans fall into the good debt category, and here’s why they’re worth considering.

How can debt make a positive difference?

Avoiding debt altogether might sound appealing. But is it really a viable option, for instance, if you want to buy a home or a car? Having no credit record can work against you when you do need to borrow, because lenders need proof that you can manage credit responsibly. A healthy amount of debt, handled well, shows financial maturity. 

Used responsibly, debt isn’t a trap – it’s a tool. Paying your bills on time and in full builds your credit score, making it easier to qualify for larger loans when you need them.

But how do you decide when taking on debt will be a good money choice?
 
Good vs bad debt

The idea of good debt might seem odd, but it’s all about purpose and potential payoff. Good debt helps you build wealth or achieve important goals, like buying a home, starting a business, or furthering your education. It’s an investment in your future.

Bad debt, on the other hand, is usually for things that lose value quickly – for example, buying groceries and daily necessities on your credit card but not paying it off in full every month, so you’re charged interest.

Any debt can be good if you manage it wisely. A small store account, for example, can help you build your credit history, which is vital when applying for bigger credit amounts like a home or car loan. The key is knowing how to draw the line and make informed choices.
 
Good vs bad debt: A question of purpose and affordability

Good debt can buy you something that will grow your wealth or improve your financial situation. Home loans are a perfect example. The property you buy is likely to increase in value over time, giving you a return on your investment.

Examples of good debt

• Business loans
• Car loans
• Home loans
• Student loans

Bad debt often comes from spending on impulse or relying on credit for daily needs. If you’re paying only the minimum amount owed each month on an account that charges interest, while continuing to buy more, you’ll rack up debt that’s hard to escape.

Even necessary debt, like a loan to buy an appliance, can become bad debt if you mismanage it. Borrow only when it’s essential and ensure you can repay it on 

Examples of bad debt

• Credit cards that you don’t settle in full every month, so you end up paying interest on interest.
• Overdrafts for frequent cash shortfalls.
•  Personal loans for everyday expenses or to buy unnecessary luxuries.
• Store accounts that you never pay off in full, so they too generate interest on interest.
  

How to use different types of personal debt

There are 6 types of debt that you can apply for as an individual. Each has a different purpose, so you can choose the right solution for your financial situation.

1. Overdraft           

This is a credit facility on your current account to help manage cash flow for emergencies. It is a buffer to avoid penalties if a debit order goes off on the wrong date, or if you have an unexpected expense. If you have an overdraft on your account, make sure that you budget only according to what you earn. If you use the overdraft for things other than emergencies, it will become difficult to manage and pay off.

2. Credit card

This is a revolving loan facility that gives you access to interest-free credit for up to 55 days. That means that you will not be charged interest if you pay it back within 55 days. Just like an overdraft, if you spend more than you can afford, a credit card can become bad debt that’s difficult to manage.

3. Personal loan

This is a lump sum of money paid into your account that you repay in monthly instalments with a fixed interest rate. This is a better solution for unexpected emergencies, such as broken appliances. You will have an agreed-on monthly instalment that will be paid from your current account by debit order, so you’ll never forget to make payments.

4. Student loan

A lump sum loan for which you must reapply after every year of study. This loan is to help students pay for tuition, books, other educational supplies, and living expenses.

5. Vehicle finance

A lump-sum loan to help you buy a car, paid back in monthly instalments (usually over 72 months, but shorter and longer loan terms may be available).

6. Home loan

A home loan enables you to buy property or invest in property development. It’s probably the best example of good debt, as it’s an investment that usually increases in value.
 
Why you should get a home loan

A home loan is a long-term investment to grow your wealth, because the property should be worth more than you paid for it if you decide to sell it one day. Or you can rent out the property to tenants and use the rental income to pay off your home loan.

Usually, a home loan is structured over 20 years, but longer or shorter periods are available. You’ll increase your chance of qualifying for a home loan if you can pay a deposit, but depending on the value of the property, you may qualify for a 100% loan.

As a first-time home buyer, you may qualify for a home loan of up to 109% to cover bond and transfer costs. You can also register a joint bond, so that 2 or more parties are responsible for the loan payments.

When a home loan is approved, it will usually come with a variable interest rate, but you can switch it to a fixed rate for a specified period. Although a fixed rate is typically higher than the current variable rate, it can be a wise choice if interest rates start to rise steeply.

Your monthly instalments are a set fraction of the amount borrowed. If you choose a variable rate, the instalments will be adjusted when the interest rate changes. If the interest rate does change, you can adjust your monthly budget and plan your finances accordingly.

What other costs must you keep in mind?

• A once-off initiation fee and monthly service fee.
• Other non-finance fees, like property transfer and bond registration fees.
• Bond cancellation fees that you must pay to the attorney who applies to cancel your bond after you have 
 paid off your home loan and want your title deed, or when you sell your home.

• Home loans are a powerful way to secure your financial future, but they need careful planning. Before you apply, ensure you understand the terms, interest rates, and additional costs. Borrow within your means and prioritise your payments to avoid financial strain.
• Good debt is an investment in yourself. By approaching debt responsibly, you can make it a tool for building wealth and achieving your life goals.

Here are some of the investment types available to you: