The debt relief conundrum

13 Apr 2020

Karen Meyer

Digital content writer

What are the long-term consequences of the short-term debt relief being offered to individuals during the Covid-19 crisis?

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Since the start of the 21-day lockdown, many financial institutions have announced various ways of assisting their clients financially through the next few months, from payment holidays to the restructuring of finance.
 
Cumesh Moodliar, Head of Investec Private Banking SA, says that banks are getting an increased number of queries regarding home loan relief measures. “Since a home loan is probably the biggest expense of a household on a monthly basis, it is logical for consumers to look for options to reduce repayments in tough times.”
 
Although consumers are likely to be tempted to jump at the chance to opt into a home loan relief option, it is important to understand how these will work.
Cumesh Moodliar

Do your homework. Credit providers offer different kinds of payment holidays with new terms and conditions, especially if there is a change in interest or term, so you need to assess every option individually.

Cumesh Moodliar, head of Investec Private Banking SA

Contractual relief vs credit indulgence relief

There are two types of relief categories on home loans – contractual relief and credit indulgence relief. “Contractual relief should really be the first choice as it allows homeowners to use an existing feature of the home loan. For example, you can use funds in advance if you have an access facility on your loan to service instalments over a specific period (such as three months). You can also do a readvance and borrow back up to your original facility amount,” Moodliar explains.
 
“Credit indulgence relief is where a bank offers its clients something over and above what’s available contractually. It could result in a restructure of the existing contract terms or obligations. Relief options could include generic payment holidays, a further advance or more individual arrangements, such as reverting the loan to interest-only repayments for a period, extending the loan term or scheduling lump sum instalments.”
 
Each of these relief options work differently and have different short and long-term implications. So, consumers should take time to understand the offer before deciding on the best option for their specific circumstances. Moodliar comments, “For home loans, you should consider the impact on your existing loan contract in terms of interest rate, loan term, instalment and balance owing as well as current or additional fees due.”

The options explained

Funds in Advance

If homeowners pay more into their home loan account (with an access facility) than the required repayment amount, they generate Funds in Advance. “You are able to draw down on these pre-paid funds with no changes to the terms of your loan contract. If you have funds in advance in your home loan, it is wise to use these first for your instalments before looking at any other options as it will not take you further into debt,” Moodliar remarks.

 

Readvance

A readvance is when homeowners borrow back up to your original facility amount, effectively drawing back on funds they have paid into their loan. This usually involves submitting updated financial information and can require a formal credit application. This option may result in changes to the existing loan contract and may affect the term, rate and monthly repayments.
 
“Investec offers our clients with a home loan an Unutilised Facility. This benefit is already included in their home loan and allows them to draw up to the original approved facility amount every year for the first five years. The benefit is that they don’t have to go into a credit process for a formal review and nothing changes on your current loan agreement,” he adds.

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Credit insurance

There is a third option of credit insurance - an insurance policy that pays off the full outstanding debt (subject to certain limits) if the life assured dies or is permanently disabled. In the case of termination of employment or temporary disability, the insurance provider will pay a portion of the debt for a specific time. All claim payments are subject to the insurer’s terms and conditions and will vary depending on the individual’s circumstances.
 
Moodliar notes, “This insurance is usually included as part of the loan agreement because the cover is linked to a specific loan and claims can only be used for settling debt. You need to check your loan agreement to see if it includes this insurance. Depending on the credit provider and loan type, this may be a compulsory or optional product. Not all credit providers, such as Investec, offer credit insurance on loans.”
 
Having a long-term life insurance policy in place could also help alleviate some concerns. “Having the right Life, Funeral, Disability, Severe Illness and Income Protection Cover in place will give you and your family peace of mind during uncertain times,” he adds.

Credit indulgence relief

In terms of credit indulgence relief, homeowners can apply for a further advance on their current home loan, which gives them access to additional equity in their property. As it requires more than the original loan amount, it will require the bank to re-contract terms with the client and establish a new term and rate. It could also require an updated valuation on the property as well as submitting updated financials for credit review to ensure affordability.
 

What is a payment holiday?

 
Moodliar comments that credit providers are offering many different payment holiday options at the moment due to the financial impact of Covid-19. “This type of moratorium, for the most part, is packaged as a generic one to six-month repayment pause on your home loan that you can opt into, as agreed to by the credit provider. It does not mean that the credit provider simply waives the instalments but defers it for a period of time. Credit providers continue to calculate interest over the payment holiday period and could capitalise it into the home loan. Make sure you understand how your credit provider has catered for the repayments, in terms of capital, interest and fees. It could include extending the loan term, increasing the repayment amount or reviewing the current interest rate.”
 
In essence, a payment holiday gives homeowners a brief reprieve on their monthly instalments, but they will pay more interest over the entire term of the loan. So this is short-term relief, but it has long-term financial consequences.
 
“Do your homework. Credit providers offer different kinds of payment holidays with new terms and conditions, especially if there is a change in interest or term, so you need to assess every option individually,” he adds.
 
Another option is personalised repayment arrangements that meets specific individual needs and situations. These could include interest only repayments, extensions of a loan term or scheduled lump sum instalments. “Get the new terms of this arrangement in writing and make sure you read any documentation before signing.”
 

Get a plan tailored to your needs

 
Moodliar remarks that Investec doesn’t believe in implementing a single blanket solution for their niche client base.
 
“We take the time to understand each client individually - from young professionals, to high income individuals as well as businesses. Our close, long-term relationships with our clients enable us to collaborate closely with them. We find considered and appropriate financial solutions that are not a quick, short-term fix, but will help them manage and protect their wealth.”

About the author

Karen Meyer

Karen Meyer

Digital content writer

Karen has degrees in BA Communications and Honours in Journalism. She's responsible for writing and editing all the communication for Investec Private Banking. She has extensive experience in corporate communication and has worked in marketing for some of the country’s biggest brands.