If rising interest rates have put the squeeze on your repayments, ask your lender to make a plan advises a leading article In the most recent edition of Pam Golding Properties Intellectual Property magazine.
Growth in mortgage advances has hit the wall of high interest rates, the shrinking of household disposable incomes and the strictures of the National Credit Act – grist to the mill of the SA Reserve Bank’s strenuous efforts to contain consumer spending and borrowing.
The number of mortgage applications being declined by the banks has risen, although the institutions are unwilling or unable to put numbers to the trend. Many applications are being turned down not necessarily because of borrowers’ credit backgrounds not meeting the required standards, but because of inadequate earnings. This is frequently the case with first-time buyers. Young couples are being advised to lower their sights.
It is a far cry from two or three years ago when the banks were competing actively to grow their mortgage books, offering preferred borrowers rates of two percentage points below prime. They have been criticised by the monetary authorities for this profligate lending which has now landed so many people in the financial soup. Due to the interest rate climb since June 2006, bondholders are now paying greatly increased repayments. Moreover, this is with after tax cash!
To be fair, neither the financial institutions nor anyone else had wind of the impending inflation take-off, which has motivated the Reserve Bank to raise interest rates by 4% since then. Throughout 2006, most bank analysts, in their regular forecasts, were adamant that the rates increases had come to an end. And so the lending spree continued. Now the chickens have come home to roost.
Not only are the banks turning away would-be mortgage bond borrowers, the rate of people defaulting on their monthly payments is growing. Owen Sorour, Standard Bank’s director of secured credit, reports: “Industry trends reflect that the number of accounts defaulting are in excess of 30% higher than a year ago.”
Sorour elaborates: “Although the lower income groups are slightly more sensitive to rate hikes, we have seen an increase in delinquencies across all segments.”
For many people, the mortgage bond rate increases have become the proverbial debt trap. So what do you do if you can no longer afford to repay? Do you walk out and start another life?
Certainly not, say all the banks. They insist that they will fall over backwards to help and advise that the earlier a customer contacts the bank due to financial difficulties the easier it usually is to assist.
Sorour explains: “Should a customer default the first and foremost objective of the bank is to rehabilitate the home loan account, irrespective of the stage of delinquency (from early arrears up to the day on which a sale in execution may take place). It is in neither party’s interest to sell a house in execution as the price obtained is usually at a discount to the normal market value.
“A house sold in execution increases the bank’s loss as well as the shortfall (the amount the customer ultimately needs to pay the bank if the bond is larger than the sale price after costs).”
Sorour stresses: “A bank will always be more lenient with a customer who shows intent and willingness to repay his/her debt. Ignoring requests to contact the bank to make repayment arrangements will only serve to exacerbate the situation.”
But what can one do? Banks offer various arrangements for customers experiencing difficulties in maintaining monthly payments. These include:
• An agreed period of time within which to catch up on arrears
• Restructuring instalments over a longer term (this reduces the monthly amount that is outstanding)
• Reducing payments for a specific period after which the customer must have the ability to service the normal repayments
• Suspension of payments for a period depending on certain criteria being met
• Surrendering of collateral
• Interest only payments
• If it’s crunch time, banks will help sell the property.
In the latter instance, Sorour points out, if a customer has exhausted the means of improving his/her cash flow it makes no sense to make an arrangement that will come to nothing after a few months.
Incidentally, extending the period of the bond doesn’t realise as great a saving as one would expect.