The year 2020 was hardly 90 days old when South Africa began to experience the massive impact of the Covid-19 pandemic on all fronts.
Suddenly, by the beginning of March, it had become apparent that the country’s banks would need to provide significant debt relief measures to individuals and businesses to help absorb the unforeseen and unprecedented adverse economic impact of the pandemic in response to the financial burden brought about by the sudden lockdown restrictions and regulations.
According to Thozama Mochadibane, head of customer delight at Nedbank Home Loans, by mid-March up to 35,000 clients had opted for some debt relief measure or payment holiday because of either temporary reduced income or no income at all.
By clients taking up these options they can go up to a period of three months without servicing the monthly bond payments; and due to the capitalisation of interest and other service fees the amount that would be owing in arrears at the end of the payment holiday would be quite substantial.
To ensure that arrears amount does not become a financial burden that the client would have to pay overtime an automatic restructure would be done to clear the arrears and provide the clients with a clean slate and fresh start.
She pointed out that whilst the payment holiday options have been one of the most sought after and valuable forms of financial relief offered by financial institutions many have argued and challenged that they may not be the best option for clients in the long-term and may place clients into a long-term financial trap.
One way to overcome this challenge is an automatic restructure on your loan.
Mochadibane said that the best way to explain the impact of an automatic restructure post a payment holiday period, is to look at an example of a customer with a home loan of R1 million who received payment relief to the value of R29,000 (of three instalments) within 5 years of taking up the loan.
The impact of the restructure due to the capitalisation of the accumulated arrears would be the payment of an extra R106,000 over 14 months post the initial term of the loan. However, this would be the case if the customer sticks to paying the original instalment of R9,650 per month over the remaining life of the loan.
To alleviate the financial burden that is apparent in the cited example, Mochadibane pointed to two options which clients can consider in tackling this challenge:
1) client increases instalment once-off by 5% after 12 months and;
2) client increases instalment annually by 1% after 12 months.
In respect of option 1, should a customer be in a position 12 month after receiving debt relief to increase the instalment by 5% (once-off), they will only pay R483.00 extra per month but repay the loan 5 months sooner than the original loan term.
This can be done by the client with or without the bank’s involvement or assistance, through:
1) the client simply depositing the additional amount into his bond account monthly;
2) a once-off request by the customer to the bank to increase his monthly debit order by this amount;
3) a request by the client to the bank to restructure the loan in order to shorten his term to 175 months.
All three of these choices will have the same effect on the overall cost of credit and repayment term, thereby undoing the effect of the restructure, said Nedbank.
In respect of option 2, should the client be in a position 12 months after receiving debt relief to increase the instalment payment by 1% annually (as little as R100 more per month), they will pay less over the life of the loan and repay his loan off 9 months sooner than the original loan term.
This can be done by the client with or without the bank’s assistance or involvement, through the client simply depositing the additional amount into his bond account monthly, or an annual request by the customer to the bank to increase the monthly debit order by this amount.
Both choices will have the same effect on the overall cost of credit and repayment term, thereby undoing the effect of the restructure, Nedbank said.
The future impact of the restructure across the different options