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The ‘cheapest’ way to finance a payment holiday

Not as simple as skipping three payments and then adding three.
Image: Shutterstock

Many South Africans are requesting or taking up banks’ offers of a three-month payment holiday on their debt (and in some cases, banks are requesting customers in certain segments to opt out of these).

A payment holiday is not a solution for everyone, however. Small business owners would typically require significantly more help from their banks. But, in the case of salaried individuals who have been forced to take a pay cut, or have lost out on commission they would normally earn (or overtime traditionally worked), it is likely a very sensible course of action (along with cuts in unnecessary expenses) until things return to normal.

For payment holidays, the default plan across most banks is that interest and standard monthly administration fees will still accrue for April, May and June and that the term remaining on the loan in question will be extended. Sounds simple enough. But, the extension on the term of the loan is almost always not three months. This is an easy incorrect assumption to make.

On short-term debt, like a personal loan, or one with a relatively short remaining repayment period, the impact of the accrued interest and the term extension is not that significant. It could still require a fourth (or fifth) month’s payment to cover the additional interest.

On long-term debt like a home loan, however, you will end up paying significantly more by simply taking up the offer of a payment holiday and extending the term. Here, the term extension could easily be closer to a year (!) than to three months, given that the monthly repayment would need to remain the same.

FNB, perhaps uniquely among banks, is promoting a Cashflow Relief Plan instead of a straight term extension. Simply, this is a separate ring-fenced loan used by the bank to cover the repayments due over these three months. Repayment will start once the relief period is over.

Doret Jooste, CEO of FNB Retail Money Management says, “The solution is designed to be less expensive compared to the traditional payment break with a term extension, where a customer could potentially be paying ‘interest upon interest’, fees are still levied during the break and their repayments on the longer term will be based on the conditions of the existing agreement, for example interest rate and fees. In the long-term, the total cost of credit for a payment holiday with a term extension is significantly higher than a cashflow relief plan.”

Home Loan Balance (31 March) R1 000 000
Rate 7%
Remaining number of payments 204
Monthly payment/instalment (R8 397) (R8 544)* (R8 397)
Payment Break – number of months 3 3 3 (bank pays via Cashflow Relief Plan)
Balance after Payment Break R1 017 602 R1 017 602 R992 265
New remaining number of payments after Payment Break 212 201 201
Extra payments needed i.e. number of months added due to term extension 8 0 0
Additional cost of credit paid due to term extension R59 019 R30 151 R0
Customer pays a total of (on underlying agreement) R1 771 926 R1 743 059 R1 687 718
Balance on Cashflow Relief Plan after payment break (R25 190)
Rate on Cashflow Relief Plan** 7.75%
Term*** 60
Monthly Premium, i.e. payment on Cashflow Relief Plan (R508)
Additional cost of credit paid due to Credit Relief Plan R5 275
Total paid by customer on Cashflow Relief Plan R30 465
Total paid (underlying agreement + Cashflow Relief Plan) R1 718 183
Savings to client vs term extension R28 867 R53 743

* Recalculated amount post payment break

** Prime rate charged on Cashflow Relief Plan

*** Flexible period, no penalties on early settlement

From the indicative comparison above, it is clear that a default term extension is not the most efficient way to fund a payment break. Using a ring-fenced cashflow loan on a home loan with R1 million outstanding over another 17 years (at an interest rate of 7%) would save this hypothetical customer nearly R54 000. If they manage to settle the ringfenced cashflow loan quicker, this saving will be higher still. It must be noted that they’re not really doing anything fundamentally different – they are still utilising a payment break but are simply funding it in another way. (Of course, they would be taking out an additional loan to do so.)

A further alternative (largely being downplayed by the banks) is to apply for a payment break but fund it by keeping the remaining term of the underlying agreement the same. So, on the home loan example, this customer would enjoy the payment break but would spread the balance over the remaining term. This would translate to a modest ±R150 a month increase on their payment.

What this comparison shows is that consumers taking up these offers need to understand the impact of what they are signing up for. If you are unsure, ask your bank.

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Thank you Hilton, please advise us also what our rights are on our tenants now suddenly also not paying their rent, we we the owners want to pay our rent but can’t because the tenant doesn’t, how do we get the rent & resulting cost back, when they not of our doing.

Ho much of that 200 basis point reduction in interest rates are you passing on to your tenants ?

The rent to own market is flooded and new good tenants will be few and far between. Best you look after them in these times as well…

@The oracle of RSA: I understand your point and your update. My query was directed to @Keminsky88 (I replied to @Keminsk88 post, not yours).

Oracle:

So if we take your logic to its conclusion : when the property is paid off the rent should be almost zero?

No Johan

Obviously not. That would be idiotic.

If you had a property and you are now saving R4k a month because of the reduction in interest rates. Then as I said, if you have a GOOD tenant, you should pass on a portion of that benefit to the tenant.

Good tenants will be few and far between, so I would try and get that person on my books for longer by inciting them with better rent at no extra cost for me (As I just made a substantial saving).

The alternative is that the tenant now goes and buys a bargain property at low interest and leaves you , the landlord looking for new occupants in a declining market.

I am trying to be forward thinking, which is hard for must. 90% of people react to information that is already factual, instead of preparing for the inevitable factual future , based on the information at hand.

People are complaining about the JSE, Anyone that shorted the market on 1 March is smiling all the way to the bank. Yet the information is out there now!

I will make a note of this post and in 12 months when the buy to let market has crashed, I will remind you of my comment.

My advise to landlords . DO NOT BE GREEDY, PASS THE BENEFIT TO YOUR GOOD TENANTS THAT YOU WANT TO KEEP. AND LOCK THEM IN CONTRACTUALLY – EARLY.

Sorry but where did this “flood” of people come from and what’s their financial background now that they have been forced(?) to flood the market??

This article was released today

https://www.businessinsider.co.za/dont-pay-rent-2020-4

May I say it one more time. If you have good tenants best you try and keep them happy and pass on some benefit to them. Looks like the majority of people will not be paying rent

Not sure I understand the rationale here. You own the property and are contractually bound to make a mortgage payment. You have let the property and rely on rent received to cover your mortgage. The tenant fails to pay rent.

A salaried employee owns her property and is similarly contractually bound to make her mortgage payment. She loses all or part of her salary, in other words her employer fails to pay her.

Your obligations as capitalist property owner and her obligations as salaried property owner are no different. This is not a legal issue. It needs the wisdom of Solomon to find a compassionate solution. The fairest solution given that circumstances are not of anyone’s making is that the losses should be distributed in proportion to the parties’ ability to afford these losses. Good luck.

The point I am making is that the banks have said , okay mr property owner. You can now pay me a little less. I.e 200 basis point less.

Now all I am asking is how many landlords will pass that benefit to their tenants. I’m guessing ZERO, I am at the same time recommending to landlords that you quickly pass that benefit to your tenants (If they are good paying ones).

The whole problem with this whole economic stimulation plan is that its REWARDING those WITH DEBT.

There will be many losers in this whole COVID-19 issue, but I am betting that there will be MANY winners as well. Never let a good crisis go to waste…

This just demonstrates how SA’s economy is characterised by monopolies and do not really want to offer any meaningful assistance.

If you discount the additional fixed bond installments of R8,937 in 16 years’ time at 5% inflation pa, then these would cost around R3,847 in today’s money terms, or around R30,800 in total (for 8 installments).

That is equivalent to 3,7 extra installments in current money terms. Not so compelling.

Hilton
Will the banks charge interest on top of interest? Or will the 3 x interests be handled separately?
Some time ago I read an article which said the banks may not charge interest on interest. Is that still the case?

Pensioners often have Mortgage free properties rented out thus a reduction in interest rates does not help them : Their tenants dont pay and once again the supposedly savvy Investor/pensioner is left having to subsidise those who are in debt : Eish

Correct, and a contract works both ways, when interest rates go up how many tenants will say “gee yes, I see you are paying more now so let me increase my rental due payment accordingly” dream on, never gonna happen.!

The cost of extending the loan is zero in present value terms, which is the only way of looking at it.

End of comments.

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