With interest rates at record lows, South African homeowners have received some relief on their bond repayments. However, many are still struggling to meet their monthly obligations thanks to the embattled economy, widespread pay cuts and ever-increasing unemployment.
National Admin Hub Manager for Rawson Finance, Leonard Kondowe, offers some advice on alternative options to get homeowners through a difficult time and advises them to consult with their lenders. “The most important thing for existing homeowners to know right now is that there is hope – they are not powerless in the face of their challenges. Lenders are extremely supportive of clients in financial difficulty,” he says.
Negotiate a fixed interest rate
An option for homeowners struggling with monthly expenses is to consider fixing their home loan interest rate for a specific period. While Kondowe says fixed interest rates are always higher than the equivalent prime-linked rates, they are a useful option when predictability is the goal.
“A lot of homeowners may be tempted to fix their interest rates at our current record lows,” says Kondowe. “Just remember that lenders always build a buffer into the fixed rates they’re willing to offer to ensure they cover their expenses when rates inevitably rise again. That means you’ll seldom end up paying less on a fixed-rate bond, but you will have the comfort of knowing exactly how much you need to budget every month. Depending on your circumstances, that can be worth paying a little more.”
Re-advance on a home loan
“Homeowners who have already paid off a sizable portion of their bond have the option of approaching their lender for a re-advance,” says Kondowe. “This means re-borrowing part or all of the capital they have already paid off.”
Since a re-advance does not extend the repayment period of the bond or change its interest rate, Kondowe cautions homeowners that, while this arrangement does free up a lump sum, it also increases their monthly instalments.
“If you’re trying to reduce your monthly expenses, a re-advance isn’t the best idea unless it’s being used to consolidate debt by paying off more expensive loans,” says Kondowe. “If monthly expenses aren’t a problem, but you need access to more capital than your access facility has to conduct essential maintenance or repairs, for example, a re-advance can be a useful option.”
Refinancing your home
For homeowners whose properties have appreciated significantly, Kondowe says refinancing is usually a more cost-effective option than a re-advance.
“Refinancing means taking out a new home loan for the difference in value between your property’s original purchase price and its current estimated value,” says Kondowe. “This extra money can then be withdrawn to pay off more expensive debt like credit cards or personal loans, or be kept as equity in the bond.”
According to Kondowe, one of the main benefits of refinancing is the opportunity to secure a better interest rate than on your original bond. Refinancing can effectively reduce monthly repayments (assuming the equity is not withdrawn), making it a valuable tool for homeowners struggling with cash flow.
However, it’s important to note that homeowners will have to cover refinancing costs, including bond registration fees, legal expenses, VAT and deeds office levies.
“Your bond originator can help you assess whether the short-term costs are worth the potential benefits of refinancing,” says Kondowe. “It’s not a one-size-fits-all solution, so it’s important to discuss the options as they relate to your specific circumstances.”
Kondowe says that, It’s essential to understand the long-term effects that the options mentioned above will have on your bond and to remember that paying down any debt takes discipline. If you have any doubts, raise questions and explore any alternatives that may be available to you before you commit to anything.
Enlist a professional
According to Kondowe, lenders are currently very motivated to help homeowners in financial difficulty. However, it’s not always easy for homeowners to negotiate for assistance on their own.
“It can be very intimidating approaching your lender for help when you’re not sure of what your options are, or how much assistance you can expect to receive,” he says. “For this reason, I always recommend chatting to a bond originator to go through the available options, and help negotiate the best possible deal for your situation.”