Homeowners in South Africa are shooting themselves in the foot

South Africans are increasingly struggling to repay their home loans, and many are not acting quickly enough to prevent foreclosures.

According to Sentinel Homes, the number of mortgage accounts that are up to date dropped from the historic average of 92% to 88% in Q4 2023, illustrating the financial distress many South Africans face.

Sentinel Homes added that the number of loan accounts with arrears has increased by 50% from 18 months to December 2023.

Experian’s latest Consumer Default Index (CDI) for Q1 2024 also dropped, primarily due to home loans.

The CDI dropped from 4.56 in Q1 2023 to 4.69 in Q1 2024, driven by the 21% deterioration in Home Loans from 2.22 to 2.68 year-on-year.

“Globally, inflation has been quite stubborn, and interest rates remain high as a result. In South Africa, the repurchase rate (repo rate) of the South African Reserve Bank reached its highest level in 15 years,” said Renier Kriek, managing director of Sentinel Homes.

Several factors have contributed to the high interest rate and inflation environment, such as supply-chain bottlenecks during the Covid-19 pandemic, the Russia-Ukraine war, and the recent conflict in the Middle East.

Interest rates are now only expected to drop from next year as inflation has proven sticker than anticipated.

What to do

“Being unable to afford your home loan instalment is not a position anyone wants to find themselves in. Steer your own boat rather than leaving it to the vagaries of the foreclosure process. Not taking control of the situation can be financially disastrous,” advises Kriek.

He said that homeowners must agree with their home loan credit provider before they miss the first payment.

“If you couldn’t make an arrangement in advance of missing a payment, and you’ve already fallen into arrears, pay something toward the debt immediately. Just pay anything you can and keep on doing that as a launchpad for negotiations with your home financier.”

Accounts receiving payments are less likely to face foreclosure than those receiving no payments.

Moreover, if your financial distress is unlikely to end shortly, it may be to sell the property.

Distressed homeowners who market their property before the home financier’s attorney comes will ensure a better return on the sale.

“You will also avoid a slew of additional costs once the bank starts with the foreclosure process. These only serve to make you poorer, adding insult to injury.”

Kriek also noted that many people can be too proud to discuss financial matters with their family and friends.

Thus, many families are caught off guard when there is a sudden discussion of foreclosure, as they miss the opportunity to help along the way.

“Reach out to the people you love and trust, there may be a lifeline from someone who will understand your circumstances and can assess the situation with much higher fidelity than a remote credit provider.”

Banks are willing to help

Credit providers may also be willing to assist distressed homeowners by offering a payment holiday or by granting an interest-only period.

Existing arrears can also be spread over a few months or through extending the loan term.

Debt review can also be a poisoned chalice, as it will prevent the homeowner from taking on any new debt while the review is completed, which can take several years, even if it saves your home.

Moreover, the fixed costs of originating new home loans are pretty high, meaning that credit providers generally prefer rehabilitating existing customers rather than terminating the agreement, foreclosing, and then having to originate new debt.

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