If you have taken a debt payment holiday, make sure you catch it up.
I have previously warned readers against taking the three-month payment holiday offered by the banks unless you had no option. This is because the interest is capitalized and like most holidays, it ends up costing you far more than you realise.
According to Thozama Mochadibane, Head of Customer Delight at Nedbank Home Loans, by mid March up to 35 000 Nedbank clients had opted for some debt relief measure or payment holiday because of either temporary reduced income or no income at all.
While the relief helped clients get through the tough months, Mochadibane points out that this could have longer-term consequences, especially for home loans. Once you are back on your feet, you need to consider options to ensure that your payment holiday doesn’t become a debt nightmare.
Listen to Maya and Mapalo Makhu discussing this in the My Money, My Lifestyle podcast.
Based on figures provided by Nedbank, if you have a R1 million home loan and are five years into paying off your bond, the impact of a three-month debt holiday (R28 950) would add a massive 14 months onto the term of your home loan and cost you R106 000 in additional interest.
If you wish to still pay off your home loan in the 180 months originally left on the period of the loan prior to the debt holiday, you need to increase your bond repayments once you can afford to.
In a year’s time, you could for example increase your bond repayment by 5%. In the R1 million bond example this would be a R483 increase on your R9 650 monthly bond repayments. You will pay off the loan five months sooner than the original loan term and the additional interest you would have paid reduces from R106 000 to just under R2 000.
Mochadibane says you can increase the repayment in three ways:
1) Simply deposit the additional amount into your bond account monthly;
2) Request the bank to increase the monthly debit order by this amount; or
3) Request the bank to restructure the loan in order to shorten the term to 175 months.
All three of these choices will have the same effect on the overall cost of credit and repayment term, thereby undoing the effect of the restructure.
Another option, which is attractive if you cannot afford a 5% increase in your monthly payment, is to increase your bond repayments by 1% each year until the end of your home loan period. In the example of a R1 million home loan this would mean increasing your monthly bond repayment by just R100. You will pay no extra interest and settle your bond nine months sooner than the original loan term.
In this case you could either just add the extra payment each month or do an annual request to the bank to increase the monthly debit order by this amount.
This article first appeared in City Press.