Although interest rates are low, other living expenses are going up, so ensure you can afford what you commit yourself to
Low-interest rates have been a treat for homeowners – and aspiring owners – but don’t assume they will last. They are not the new normal. Geoffrey Lee, Absa’s managing executive for home loans, says when people do this, the effect of the reductions will be largely used up.
“Should rates or living expenses increase in the medium term, it is important that home loan customers be in a position to absorb slightly higher instalments or risk falling behind on their repayments.”
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Before buying
Lee says, generally speaking, buying a home is the single largest purchase many people will make in their lives. To this end, it is vital for them to arm themselves with as much information as possible. “As a customer, it is essential that you are realistic about what you can afford and you need to assess whether you can afford the loan before the application process begins.
Managing your finances and ensuring that you will be able to meet the repayment requirements, for the full period of the loan, is important. Any major investment warrants careful research before you take the leap. “Once you’ve done your homework, you can take the next step from an informed position.”
Depending on your circumstances, says Craig Mott, Rawson Property Group’s sales manager in the Western Cape, you can play it safe by applying for a bond below the most you can afford, with a sizeable deposit, or take advantage of the current lending climate to secure a loan. “There are great opportunities out there at the moment, and for those who are able and see this as a good opportunity to invest in a safe and long-term asset, now will be the time to take advantage of circumstances – but do so in a responsible manner. Rather use this time to buy low and pay off as much debt as possible, which could put you in a strong position for the future.”
Savvy spending and saving
Mott says homeowners are facing a significant rise in household expenses and so the unchanged interest rate offers an important chance to consolidate finances, pay off debt and boost savings as much as possible. “This will go a long way towards minimising the effect any interest rate increases will have on the security of consumers’ property investments and other debt, despite tight financial times.”
The relatively high cost of living and the possibility of an increase in interest rates in the short term will require consumers to review their household budgets to generate savings, says Ester Ochse, product head at FNB Money Management.
“However, small, gradual changes in how you manage your day-to-day spending, and how you think about money, can free up some cash flow to save.”
Here are four areas where you can save during these challenging times, she says:
International travel/holidays:The global pandemic has restricted travel, with stringent conditions where it is allowed. While your suitcases may be collecting dust, your holiday budget should be growing. Following the easing of inter-provincial travel, you could also explore local tourist attractions or within South Africa with some of your holiday budget.
Entertainment:With places of entertainment, including restaurants, restricted to prevent an increase in Covid-19 cases, many consumers are choosing to stay at home. Get the family involved in cooking, which has the dual purpose of entertainment for the kids and saving money.
Clothing/footwear:Look at items that you can wear at home and at the office. The dual-purpose outfits will help you save a few rands and keep you stylish at the same time. You can pick up bargains on online sales.
Fuel:Given the lockdown restrictions and work-from-home options, put your monthly travel or petrol budget into a savings account. This can be accessed at a later stage or can be used for emergencies. Ochse adds: “Consumers should consider using points earned through rewards programmes like eBucks as an alternative when purchasing food or fuel instead of using cash, which could help you save a bit more. The freed-up cash flow can then be added to savings or used to pay off debt.”
Ask for help
If you do end up in financial distress, though, you should approach your home-loan lender as soon as possible, Mott says. “Banks are open to compromise but they’re not going to overlook those who default without explanation.
“Many loan agreements have built-in credit insurance which could help you cover bond repayments until you are back on your feet.” He says for those without insurance, banks do offer debt restructuring, so it is vital to get in touch with your lender to discuss a way forward. In terms of measures to assist clients in distress, Lee says Absa has time-honoured interventions to help its customers recover from financial hardship – and many have, over the years, benefited from these efforts. “All cases are considered individually, depending on the specific customer’s circumstances.”
Contingency plans
Some homeowners struggling with their bond repayments might be able to let their property, using the rent to cover repayments. “You could let the property for rent and find something more affordable to rent yourself until you are financially sound. “You can also consider renting the property and staying with family or friends until you have accumulated some income and are ready to move back.”