South African homeowners face financial disaster

High inflation and interest rates have pushed many South Africans into mortgage arrears, leaving homeowners at risk of foreclosure and financial ruin unless they proactively negotiate with lenders or sell before banks step in.

Sentinel Homes managing director Renier Kriek explained that there has been a significant decline in the number of people who can keep their mortgage accounts up to date.

Historically, around 92% of all mortgage accounts were up to date, but this number has been dropping quite dramatically in recent times. The latest available figure shows it was down to 88% in the last quarter of 2023.

This means home loan accounts with arrears have increased by about 50% recently, and it happened in the relatively short time span of 18 months to December 2023.

Globally, inflation has been quite stubborn, and interest rates remain high as a result. Kriek said that in South Africa, the Reserve Bank’s repo rate reached its highest level in 15 years.

This means the prime rate, which is used to price home loans and other consumer debt, such as car loans and credit cards, is elevated. Several factors have caused high inflation and the high interest rate response.

These include the hangover from previous quantitative easing, supply-chain bottlenecks during the Covid-19 pandemic, the Russia-Ukraine war, and the conflict in the Middle East.

Despite earlier predictions that the high-interest-rate cycle could turn around in May 2025, it is now expected to turn around only next year due to high inflation proving stickier than anticipated.

“Being unable to afford your home loan instalment is not a position anyone wants to find themselves in,” Kriek said.

“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.”

Homeowners should act proactively

Kriek urged homeowners to reach an agreement 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,” he said.

“Just pay anything you can and keep on doing that as a launchpad for negotiations with your home financier.”

According to Kriek, accounts receiving payments are less likely to face handover and foreclosure than accounts receiving no payments.

“Do not let unreasonable hope be the enemy of your future financial well-being. If the cause of your financial distress is unlikely to abate within a reasonable time, call it a day and list the property for sale with an estate agent. Be realistic and proactive,” he said.

He recommended that distressed homeowners market their property before the home financier’s attorneys come knocking, ensuring 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,” he said.

Some people are too proud to discuss financial matters with family and friends. Many families are surprised when there is sudden talk about foreclosure, having missed the opportunity to assist when there was still time.

“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,” he said.

The foreclosure risk is real

Kriek explained that credit providers may be willing to assist a distressed homeowner by offering a payment holiday or by granting an interest-only period.

It may also be possible to spread any existing arrears over a few months’ repayments or extend the loan term. This is especially true when the bar to payment is temporary, such as hospitalisation or sudden retrenchment.

Kriek also warned that consumers should be careful not to fall prey to overenthusiastic debt counsellors. Many unscrupulous operators in that industry market debt counselling as a cure for all debt-related ills.

Entering debt counselling may not, in fact, save someone’s home, but may still have a potentially disastrous effect on their future finances.

For instance, a debt review stops someone from taking on any new debt for several years while the process is completed.

Kriek said there is a general misconception that home loans are “money-spinners” for home loan companies such as the banks. It only takes a couple of missed payments for a home loan provider to be “underwater” with a home loan.

He cautioned that homeowners should not labour under the misapprehension that they are doing the bank a favour by having a home loan with them.

The home loan itself is not a very lucrative proposition. However, the fixed costs of originating new home loans are quite high.

Banks and home loan and credit providers generally prefer to rehabilitate existing customers rather than terminating the agreement, foreclosing, and then having to originate new debt.

“Take all opportunities to steer your own boat off the foreclosure rocks. Your finances cannot afford to be shipwrecked there,” he said.