Bond holders feeling strain - how to redeem yourself from temporary difficulty

Bond holders in all categories are feeling strain due to the blows the Covid-19 crisis has dealt the South African economy. It is highly probable that an increase in bond repayment defaults will be evident soon - indeed, we are already seeing signs of this, says Rowan Alexander, Director of Alexander Swart Property.

Last year, SA urban areas saw sales in execution fall to an all-time low. In Cape Town, for example, only 79 homes were repossessed by banks or other creditors. Since the peak of 2009, when 1198 repossessions took place, the city has seen a decline in sales in execution of 20 to 25% per annum. Similarly, Durban was down to just 96 sales in executions during 2019 from a peak of 1097 in 2009, Johannesburg down to 297 from 1785, Tshwane (formerly Pretoria) down to 164 from 1981, Port Elizabeth down to 48 from 480 and Bloemfontein down to just 38 from their peak of 406.

Now, however, all involved in home marketing and sales will have to make allowance for the strong likelihood that incomes will be reduced, or cut off. South Africans in all income groups, are looking at 12 months or more before "normal" conditions are restored. This will almost inevitably lead to bond payment defaults on an increased scale.

"In the circumstances," says Alexander, "estate agencies once more increasingly find they have to advise home owners and potential home buyers on how to extricate themselves from the dangerous, debt-laden situations in which they find themselves; often through no fault of their own.

"The best advice that I and other estate agents can give is to budget FAR more conservatively, really seriously. If you are buying a home -  now is an excellent time to do so with the ultra-low bank rates - do not go for one at the upper end of your financial limits. As-I have said before, be satisfied with something less perfect than what you originally envisaged. Bear in mind too, that in addition to your transfer costs and bond repayments you will now, as a homeowner, be paying extensive municipal rates and taxes as well as water, electricity and other service charges. If you wish to preserve or increase the value of your home you will also have to budget for regular ongoing maintenance."

This advice, says Alexander, is particularly relevant to younger generations, those who have not previously lived through a recession, let alone one as serious as we now face. In SA's middle class, the younger generations have grown up accustomed to a fair measure of affluence and prosperity. They have never experienced the austerity that older generations had to cope with e.g. World War II, the 1973 Oil Crisis, the economic aftermath of the 1985 Rubicon speech, the recession of 1998 and Subprime market collapse of 2008. As a result, they are unafraid of debt and all too easily persuaded to extend their credit and live beyond their means which can be their undoing.

Home owners, whether new or already in possession of their homes for some years, should now take every possible measure to create that emergency cash buffer which Alexander has so often recommended. The best way to do this is to OVERPAY on the bond repayments month by month. This will not only protect the bond should the holder be unable to meet his repayment obligations for a month or two, but if the payments are consistent, will greatly shorten the bond repayment period.

Alexander adds that he quite often finds young upwardly mobile couples, where both are working, do save but in other ways, such as fixed deposits or trust accounts. These very seldom give an overall return as comprehensive as overpaying on the bond. With interest rates now often as low as 7,75% or even 6,75%, the ability to build up reserves through a bond is the very best way to save.

But what if the owner\bond holder still finds himself in financial difficulties? 

"If it becomes clear that there is no way out of a current problematic situation, many people go into a mental freeze, a state in which they simply ignore their problems. The right action to take, however, is for the bond holder or owner to see his bank manager or bank liaison contact as soon as possible. They are always reluctant to repossess a home, not only for humanitarian reasons but also because experience shows that repossessed homes seldom come anywhere near covering the bond holder's debts when sold. So the banker or financier, in his own interests, will often help the borrower find a way forward."

Should the homeowner put his home up for renting if he finds himself in difficulties?

"This IS a viable alternative but, if the owner goes that route, he must take every precaution to check that his tenant has sound employment and a good credit record. Defaulting tenants, as mentioned, are likely to increase under the present conditions. Furthermore, if the owner rents elsewhere he will probably have to accept a far humbler, less attractive home until he has reinstated himself. This has, however, been a proven redemption tactic for many homeowners in temporary difficulties."

For further information, please contact Rowan Alexander on 082 581 3116 or by email : rowan@asproperty.co.za