How to avoid having your home repossessed

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The eight interest rate increases since June 2006, rising inflation, and higher fuel and food prices have made it harder for borrowers to meet their home loan repayments.

Some homeowners are no longer able to meet their repayments, and the number of mortgage bond defaulters has increased substantially over the past six months, the four major banks – Absa, First National Bank, Standard Bank and Nedbank – say.

Gavin Opperman, the managing executive of Absa Home Loans, says Absa has seen a 35% increase in the number of mortgage bonds falling into arrears over the past year. Absa, which is the country’s biggest bank, has a home loan book of R204 billion.

The 4.5 percentage point increase in rates since June 2006 means that if you have a home loan of R1 million, you are paying R3 184, or 32%, a month more than you would have paid before rates started rising in the middle of 2006.

Alliance Group, which specialises in property auctions, reports that, on instruction from a major bank, it put up 20 properties for auction nationally in a single week in February this year. The South African Reserve Bank’s Financial Stability Review released last month shows that household debt accounted for 77.6% of disposable income in the fourth quarter of last year, up from 73% in 2006.

With further interest rate rises expected, food and transport costs soaring, and substantial electricity price hikes waiting in the wings, you may be unable to meet your monthly home loan repayments – and face the prospect of having your property repossessed by the bank.

Outlook for the property market

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The combination of increased interest rates and higher inflation has not done the local property market any favours. According to the First National Bank Residential Property Barometer, 83% of sellers are being forced to accept prices below their asking price, while the average time it takes to sell a property has increased from 11 weeks and two days at the end of last year to 12 weeks and four days now.

Samuel Seeff, the chairman of Seeff Properties, says the company’s sale stock has increased by 50%, while sales volumes dropped 27% in the first quarter of this year. Rael Levitt, the chairman of Alliance Group, says the auction group’s forced sales book increased 50% year on year in January 2008, and has increased by a further 30% each month since then. Levitt says forced, or distressed, sales include properties repossessed by banks, sales due to insolvencies and sales where homeowners have opted to sell because they can no longer afford their repayments.

Your repayment options

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The arrangements you can reach with your bank if you are unable to meet your monthly mortgage bond repayments include:

  • Undergoing a voluntary debt review with one of your bank’s debt counsellors. The aim is to draw up a budget and trim your expenditure so that you can meet your monthly home loan repayments.
  • Paying off the arrears over a certain period of time. The arrear repayments are then added to your normal monthly repayments.
  • Restructuring your home loan over a longer period. Home loans are usually scheduled over 20 years, but banks are amenable to restructuring your home loan over periods of up to 30 years. However, although a longer repayment term will reduce your monthly repayments, you will end up paying more in interest over the long run. If you take out a home loan of R1 million at the prime interest rate of 15% over 20 years, your monthly instalment will be R13 168.  At the end of the 20-year term, you will have paid your bank back R3.1 million.

If you extend the same loan to 30 years, your instalment will drop by R524 to R12 644 a month, but the interest you pay will increase and, in total, you will pay back the bank R4.6 million, which is R1.5 million more than if you paid off your loan over 20 years.

  • Reducing your payments for an agreed period, after which you must revert to paying the original monthly amount. However, because this will extend the period of time over which you will repay your loan, you will end up paying more in interest.
  • Suspending your monthly payments for an agreed period in certain circumstances, such as if you are retrenched or if you have to take extended sick leave because you have a serious illness or are hospitalised. Payments may be suspended for a maximum of six months. Thereafter you will have to resume your repayments as per your original loan agreement.
  • Surrendering collateral, such as a life assurance policy with an investment component, to the bank. If you are unable to meet your monthly bond repayments, the bank will cash in the policy and use the proceeds to cover your home loan repayments. Remember that you will lose part or all of your policy’s value if you surrender it before it matures.
  • Obtaining the bank’s assistance to sell the property.

How you can prevent repossession

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To avoid having your home repossessed, you should contact your bank as soon as you are unable to meet your obligations to your debtors or you fail to meet a monthly repayment on your home loan.

Owen Sorour, the director of secured credit at Standard Bank, says banks are more understanding of your financial problems if you show you are willing to repay your debt. “Ignoring requests from your bank to discuss repayment arrangements will only exacerbate the situation. The earlier you contact your bank to discuss financial difficulties, the easier it is for us to assist you,” he says.

You should try to trim your budget wherever possible, so that you can meet your essential expenses, such as your mortgage bond, car repayments and grocery bills. It may be time to cut out luxuries, such as your satellite television subscription, and to go for walks in the park instead of paying a monthly gym subscription.

If you have a financial adviser, you could also contact him or her to discuss reviewing your budget so that you can meet your bond repayments. At every stage of the arrears and repossession process, you have the option of discussing your financial situation with your bank in order to reach an agreement.

Jan Kleynhans, the head of home loans at First National Bank, says even after you have received a lawyer’s letter from your bank, you can contact the bank to facilitate rescheduling your home loan. “Even at this late stage, discussing and agreeing on a rescheduling of the loan will result in a retraction of the repossession process,” he says.

Rescheduling may involve paying a lower amount over a longer term so that you are at least still making regular payments towards your home loan. Sorour says that if you are certain you cannot meet your mortgage bond repayments, it is best to discuss the situation with your bank and arrange to sell your property on the open market in order to obtain the best possible price.

“If you are at least paying back the interest on your bond, the bank is likely to be more lenient regarding the time you are given to sell your home on the private market,” he says. Selling your property on the open market instead of at a bank auction means you are likely to get a higher price, which is in your best interests, as well as the bank’s.

This article was first published in Personal Finance newspaper on 10 May 2008. 

 

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