There have been two recent changes in the banking sector which are worth mentioning for all prospective buyers out there. The first was Nedbank taking the reins by allowing 100% loans up to the amount of R3 million. The second, was FNB allowing loans of 100% up to R2 million.
To illustrate the difference between before and after, on a 90% loan to the value of a R2 million property, you would need to have found an extra R200 000 on top of the bond registration and transfer fee costs! Now it would only mean you need the money for the costs.
With the New Credit Act (NCA) in place, it will be very difficult for people with more complicated (unclear) earning scenario's, such as the self employed (I can relate to this personally).
I can only hope the banks have learnt many valuable lessons out of the recent financial crisis, such as, don't hand out 108% loans to salaried people at the bottom of an interest rate cycle, without having these rates fixed. It's quite obvious that the salaried person's income will not match a 5% rate increase and therefore the bank ends up with a massive bad debt book!
Luckily, our government did not have to bail out any of our banks, but what about those who lost their homes!?
In an economic environment where there are so many variables that change daily, it is important to eliminate as many of the stresses as possible. The most important variable, which changes all the time, is called cashflow. The big question, especially when interest rate hikes create panic, is how to manage cashflow.
When you obtain a homeloan, it usually relates to +/- 30% of your gross income. It is important to create short term solutions which cushion some of the financial stresses relating to interest rate hikes.
If, as a salaried person, you had purchased a property at the bottom of the interest rate cycle (prime rate = 10.5%), then you will have experienced a 5% interest rate hike to date.
On a property value of R700 000 , the monthly repayment would have gone from R6,988 (at prime then = 10.50%) to R9,477 (current prime = 15.5%) over a 20 year term.
This is a massive 27% increase, in an economic climate where one would be lucky to get a 10% salary increase for the same period. The scary reality is that your homeloan usually has a better interest rate than other types of finance, therefore it makes sense to consolidate other debt into your homeloan account by taking a further loan.
The first step in the cashflow exercise is to establish which of your outstanding debts , arecosting you the most. The most common would be credit cards, retail accounts and vehicle finance(obtain advice from your tax adviser if this debt makes tax sense or not).
You can establish the cost of your debt at Bondadvisor’s new Debt Consolidation Tool, which you may use online, or simply download it to your desktop and use it offline when needed.
The second and equally important step is to establish whether or not your debt consolidation exercise is going to cost you more in the long term.
It is pointless transferring debt if your ultimate result is more debt.
Some may argue that the value of theirproperties will increase, as will their salaries, and therefore debt consolidation is just a short term solution to relieving their monthly cashflow commitments. Yes, it will help your cashflow in the short term, but then make sure that when you can afford to pay more into your homeloan account, you do so. Otherwise you pay a lot more interest over the long term.
Your ultimate cashflow guarantee on your biggest debt repayment, would be to obtain a fixed interest rate over a specified term. Different banks offer different fixed rates, therefore you can inquire at your nearest banking branch for fixed rate options.
