Meet your bond repayment obligations: how to avoid getting into difficulties

Several reports in South Africa’s property media have drawn attention to the recent increase in bank repossessions of homes and the problems that consumers in most income categories are experiencing in making ends meet.

“Last year,” said Rowan Alexander, Director of Alexander Swart Property, “many Greater Cape Town precincts saw sales in execution fall to an all-time low.  In Kuils River, for example, only 33 homes were repossessed by banks or other creditors.  This year there are, however, clear indications that repossession sales are once again becoming an unfortunate feature of the South African property scenario.”

Since the catastrophic years of 2008 to 2010, when the entire global economy went into meltdown, there had, said Alexander, been a slow improvement throughout the Cape Town residential sector—and from 2013 repossession sales had dropped annually by 20% to 25%.  This encouraging trend, he said, is however now over.

In the new circumstances, said Alexander, conscientious estate agents find themselves once again having to advise home buyers on how to buy sensibly and, in many cases, how to extricate themselves from the precarious debt-laden situations in which many now find themselves.

“The best advice that I and other agents can give a home buyer, particularly a first time buyer,” said Alexander, “is to budget conservatively.  Do not go for a home at the upper end of your financial limits:  be satisfied with something less perfect than you originally envisaged and bear in mind that apart from your bond repayments you must make allowance for inflation, municipal rates and taxes and service charges in addition to ongoing maintenance costs, which are essential if you wish to preserve the value of your home.  Also, try not to budget on the expectation of getting an increase in your income next year or the year thereafter – which in the current poor economic conditions might quite possibly not materialise.  Always try and have a buffer sum of unspent income at the end of each month.”

This advice, said Alexander, is especially pertinent for millennials (those born between the late 1980s and early 2000s). “These upwardly mobile, on-the-go, younger generations have never lived through a serious recession.  They have grown up used to reasonably stable economic conditions and a fair measure of affluence.  As a result, they are not as afraid of debt as the older generations were taught to be – and this can be their undoing,” said Alexander.  “A healthy fear of debt has been the making of many a billionaire.”

Once, however, a home purchase has been made, said Alexander, the new owner should work day in and day out towards creating the emergency buffer in his finances already mentioned and the best way to do this is to overpay as much as possible on the monthly bond repayments.  If this involves cutting back on extraneous items such as garden furniture, holidays or cars, that, he said, should be accepted.  Overpaying month by month on a bond will, of course, also shorten the time it takes to pay off all that is owed and will significantly reduce the amount actually paid out.

“Quite often,” said Alexander, “I find responsible young couples saving elsewhere - for example, in fixed deposit or trust accounts.  While that is commendable, for most home buyers with bonds (the vast majority) the interest they earn on savings will almost always be lower than what they are paying on their bond (i.e. ± 10,25% on average today).  Reducing the bond by as much as possible, therefore, is the most efficient way to save.  One has to remember, too, that for most middle class people their homes are their greatest asset and they should be protected at all costs.”

If the home owner/bond holder, having taken this advice, still finds himself in difficulties, what then?

“If it is clear that there is no easy way out, it is important to contact your bank manager as fast as possible,” said Alexander.  “With the bank’s experience they may be able to make an arrangement that will see you through a difficult period. If this is not possible and they cannot help, it is important to face reality.  That means contacting a reliable agent as soon as possible and putting your house on the market.”

This advice, said Alexander, is one that very few home owners in trouble accept when it is first offered to them.  However, he warned, it is the only way to minimise one’s losses once one is in a loss situation.  The buyer must accept, having contacted an estate agent, that, as an urgent sale is almost always necessary and in these cases, he cannot hold out for a totally market-related price, he must sell fast. On a typical suburban home he must be prepared to sacrifice R1000 000, R2000 000 (or more) to achieve a quick sale.

“If you wait until the bank takes possession,” said Alexander, “and puts the home up for auction, you can be absolutely sure that the price paid for it will, except in very exceptional cases, be 20 to 40% below what a reputable agent would be able to achieve for you because these buyers are forced to pay cash on the fall of the hammer and this greatly reduces the seller’s ability to get a fair price.  I have seen cases, for example, where homes worth R2,5 million have been sold for R500,000 less.  The banks, whose sole aim is to clear the matter up as soon as possible, will accept almost whatever they are offered.”

Asked if it might not be better for the home owner in financial difficulties to rent out rather than to sell his home and find somewhere else for he and his family to rent for a few years, Alexander said that this has been known to provide an effective solution.  However, he warned, there can be no guarantee that the tenant, no matter how decent and honest, will always be able to pay the rent.  The home owner could then end up in a situation where he is not only paying his own rent but is also having to service his bond – putting him in an exceptionally difficult financial position.