What payment relief is costing you
● Understanding the payment relief offered by your bank and the costs involved is important, even if you have no choice but to take it. But the cost shouldn’t necessarily be your key concern; the predictability of your future income and what you can afford to pay after the payment break are critical.
Most banks are offering a payment holiday during which time you do not pay instalments but interest accrues on your loan and the interest and repayments you do not pay extend the term of your loan.
FNB’s cash-flow relief plan similarly gives you a payment break from your monthly instalments for three months, during which time the bank makes these payments on your behalf, so you have the cash to cover other expenses.
This means the term of your home loan agreement is not extended, but after the three months you must repay the cashflow relief loan separately and it attracts interest at the rate of prime and there are zero fees.
According to FNB, this is less expensive than the traditional payment break with a term extension, which can result in you paying interest on interest, plus fees, and your repayments over the longer term are based on the conditions of the existing agreement, including 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 cash-flow relief plan,” says Doret Jooste, CEO of FNB Retail Money Management.
Jooste says unless you calculate the cost of a term extension, you can easily interpret it as “skip three payments now and add three at the end” and assume the total cost of credit will not change significantly.
To illustrate, she provides the example of a 20-year R500,000 home loan that still has 17 years to run.
If the customer is paying interest at 7%, taking the payment relief with a term extension will add eight months to the life of the bond, and cost almost R30,000.
But if the customer went with a cash-flow relief plan like the one offered by FNB it would cost half that.
Ewald Kellerman, the chief risk officer of home loans at Absa, says the bank’s payment relief with a term extension can cost more than one on an emergency loan. But after the relief period, the customer with the emergency loan like FNB’s is saddled with two instalments: the original home loan instalment plus the instalment on the emergency loan.
“The emergency loan mechanism requires the additional loan to be repaid, starting after the initial three months. This increases the minimum amount payable on a monthly basis,” he says.
With Absa’s payment relief, after the relief period you revert to paying your original instalment and nothing more, albeit over a longer term and at a cost. Kellerman says that if you extend your home loan, the most it will add to your term is 10 months, and the shortest three months, depending on the age of the loan when you take the relief.
Kellerman says having the flexibility to pay more than your contractual instalment at a later stage when you can afford it gives
The emergency loan mechanism requires the additional loan to be repaid, starting after the initial three months
Ewald Kellerman chief risk officer of home loans at Absa
you the power to reduce the total cost of the credit significantly.
Absa decided not to use an emergency loan system because the customer must be able to prove loss of income and many people can’t, he says.
“Many customers will struggle to prove their loss of income, and [their financial] stress may be related to an unexpected expense or loss of income of a family member.”
He says Absa customers have already opted for payment relief on 560,000 accounts, of which 130,000 are home loans. Some have opted to take the relief “to play it safe and lock in the liquidity”.
But since interest continues to accrue, customers are “urged” to continue paying their monthly instalment if they can.
Kellerman says payment relief is not a payment holiday. It must be seen for what it is — a short-term cash-flow relief solution.
If you need to take the payment relief, you’re not obliged to use the full term, and can settle your loans earlier. If, for instance, your income recovers and you’re able to play catch-up, you’ll get the interest benefit.
If you have an access bond and have paid extra over the years, you can draw on the additional funds. For many, this is their emergency fund; now might be the time to use it.