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Home Loan News : Banks offer Home Loan advice during tough times

The current climate of high interest rates, and rising food and petrol prices is driving up the average cost of living in South Africa.
In response to this the four major Banks –ABSA, Standard,FNB andNedbank – have come out unanimously agreeing that homeowners should look to consolidate debts into one low interest account.

The easiest way to lower your monthly expenses is to consolidate all your high interest [short term] debts such as Personal Loans, Credit Cards and Car Loans into one low interest account – your home loan.

Gavin Opperman of ABSA Home Loans says: “Consolidating debt into a single loan provides our customers with a single, affordable debt repayment on a monthly basis.”

The interest charged on your Home Loan account is about 14 %, far less than your credit cards which is often as high as 23%.

[If your home loan interest rate is not 13.5% or lower – click here to get a better rate]

The other advantage that debt consolidation offers is an Extended Loan Term, which lowers your total month expenses. Although you’ll be increasing your monthly cash flow, extending the loan term would mean paying more interest.

Speaking to the Standard Bank Home Loansproduct director Shaheen Adam said although debt consolidation made sense, ideally consumers needed to be frugal with their expenditures and should try to pay off short- term debt such as credit card repayments sooner, even after consolidation, to benefit from lower interest rates.

John Loos ofFNB Home Loanssaid FNB agreed that extending short-term debt into a longer term was not always good, but current economic conditions necessitated people looking into the consolidating option.

And, Nedbank Home Loans have setup a debt counselling department to assist with credit restructuring occurs and make debt more affordable to their clients.

TIP*Cut down, don’t sell

Consumers should not make harsh decisions like selling their property, but rather revise their budgets and weather the storm.

“Look for cheaper options on things such as insurance products. Competing companies are likely to give you a better deal to acquire your business, especially in the current economic climate,” says Deon Lessing.

He quotes Finance Minister Trevor Manuel in saying that the inflation target band will remain unchanged at 3% to 6%. But this month the measure of inflation will change from the current CPIX inflation to headline CPI. This should bring about a lower inflation rate.

“Mortgage interest rates will be replaced with owner’s equivalent rent. Mortgage interest rate changes directly affect the measure of housing costs, which is why they were previously excluded from the target measure of inflation. The new measure will enable the cost of housing to be represented in the target measure,” says Deon Lessing.

“Inflation on necessities such as food and petrol are inescapable, which has repercussions on consumer spending. It’s simple: rising inflation erodes household spending. Even though food and petrol prices are now dropping, the weaker Rand has, to some extent, cancelled the effects on this.”

The current CPIX is based on expenditure patterns in 2000, whereas the headline CPI will be measured on the household income and expenditure survey of 2005/2006. Spending patterns have dramatically changed. Consumers have been hit with a cumulative 500 basis point interest rate hike since 2006, which lead to consumer spending declining. Soaring inflation rates reached a record high of 13,6% year-on-year (y/y) in August, and this, coupled with slowing income rates, has left consumers tightening their belts.

“Although we may be through the eye of the storm, we are still in for tough times ahead. It is important not to panic as fundamentally the South African market is still strong. We will not see growth in 2009 as we did between 2004 and 2007, but we are still far from recession.”

Manual advised that consumer inflation had been outside the target band for the last 15 months and inflation targeting will remain the anchor for the monetary policy.
Although navigating through this tough economic environment will be a challenge, the government will continue to expand and improve public services, investing in the infrastructure required for growth.

“Although the first half of next year may still be affected by past interest rate hikes, the new measure should bring the inflation rate back towards the target, which will bring about interest rate cuts. The sentiment is that interest is currently returning to the property market, but rate cuts will accelerate the market recovery period. South African consumers are better off than those in the US, who have a debt-to-income ratio of over 130% due to lax credit regulation. The introduction of the National Credit Act (NCA) has helped the South African consumer prepare for the current global crisis,” Lessing concludes.