With interest rates at record lows, South African homeowners have been given 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. 

But there are alternative options to get homeowners through a difficult time - especially if you consult with your lenders who are being extremely supportive of clients in financial difficulty right now. 

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 of time.

While 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.

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.  

There isn’t a simple answer to the question of fixing, or not fixing. But there are some important factors to take into account whenever you consider this question.

Three factors to think about:

Some of the most important factors in deciding whether to fix your interest rate or not are:

  1. Market conditions at the time of securing the loan.
  2. Loan term. Fixed interest rates are usually for up to five years. So, with a home loan spanning 20 years, you’ll soon need to renegotiate terms, which could then be less favourable than before.
  3. Amortisation period. This is the total length of time it takes to pay off a loan. By extension, the longer the amortisation period, the bigger influence a change in the interest rate will have on your repayments.

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, 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. If monthly expenses aren’t a problem, but you need access to more capital than your access facility has in order 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, 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. 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. This can effectively reduce monthly repayments (assuming the equity is not withdrawn), making it a valuable tool for homeowners struggling with cash flow. 

Those who don’t have a bond can refinance their properties will find it is also cheaper in the short-term than a personal loan.

When a homeowner applies for refinancing, the home will have to be revalued and the applicant’s credit history and affordability for the additional finance will be reviewed. Once these assessments meet with the lender’s approval, the application will be approved. If the homeowner is borrowing a portion of the original home loan or accessing funds registered for future use, the funds will be made available immediately after approval.  

However, it’s important to note that homeowners will have to cover refinancing costs, including bond registration fees, legal costs, VAT and deeds office levies.

If you consider any of the above options, keep the long-term effects on your bond in mind and remember that paying down any debt takes discipline. If you have any doubts, rather raise questions and explore any alternatives that may be available to you before you commit to anything, advises Kondowe.

Enlist a professional

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. For this reason, I always recommend chatting to a bond originator to go through the options available to you and help you negotiate the best possible deal for your situation.

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This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)