What to do if you start falling behind on your home loan

Consumers on all income levels are finding it harder and harder to keep up with their home loan payment as they struggle with their income not keeping up with their expenses. The significant decline in the number of people who can keep their home loans up to date clearly illustrates the level of financial distress consumers currently experience.

Historically around 92% of all home loan accounts were up to date, but it has been dropping dramatically in recent times. The latest available figure shows it is down to 88% in the last quarter of 2023. That means home loan accounts with arrears have increased by about 50% recently and it happened in the relatively short time span of 18 months up to December 2023.

Inflation has been quite stubborn globally and interest rates remain high as a result. In South Africa the repo rate of the South African Reserve Bank (Sarb) reached its highest level in 15 years, says Renier Kriek, managing director of Sentinel Homes. This means the prime rate, used to price home loans and other consumer debt like car loans and credit cards, is elevated.

ALSO READ: More SA consumers battling to pay their home loans and credit cards – report

High inflation and the high interest rate response was caused by a confluence of factors, including the hangover from previous quantitative easing, supply-chain bottlenecks during the Covid-19 pandemic, the Russia-Ukraine war and the recent conflict in the Middle East.

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

Don’t just leave it when your home loan falls behind, take action

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

Prevention is always better than cure and he urges homeowners to come to an agreement with their home loan credit providers before they miss the first payment. It is important to stick to the arrangement and never over-promise and under-deliver.

“If you could not make an arrangement before missing a payment and you already fell into arrears, pay something toward the debt immediately. Just pay anything you can and keep on doing that as a launchpad for negotiations with your home financier.”

ALSO READ: South Africans cannot afford their homes but also can’t afford to sell them

Accounts that receive payments are less likely to face hand-over 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 pro-active.”

He recommends 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 your poorer, adding insult to injury.”

Men often too proud to discuss financial distress

Some people, particularly men in Kriek’s experience, tend to be too proud to discuss financial matters with family and friends. Many families are caught by surprise when there is suddenly talk about foreclosure, having missed the opportunity to assist along the road.

“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.”

Credit providers may be willing to assist a distressed homeowner by offering a payment holiday or granting an interest-only period, he says. “It may also be possible to spread any existing arrears over a few months ‘repayments or extending the term of loan. This is especially true when the bar to payment is temporary, such as hospitalisation or sudden retrenchment.”

ALSO READ: Even the rich buckling under credit stress

It is also important for consumers not to fall prey to over-enthusiastic debt counsellors, he warns. “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 your home, but may still have a potentially disastrous effect on your future finances. For instance, debt review stops you from taking any new debt for several years while the debt review is completed.”

Kriek says 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 “under water” with a home loan. Do not labour under the misapprehension that you are doing the bank a favour by having a home loan with them – the home loan itself is not a very lucrative proposition.”

Help from banks

Nevertheless, Kriek says, the fixed costs of originating new home loans are quite high. Banks, home loan or 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.”