Consumers struggling with mortgage repayments

Information released by credit bureau Compuscan revealed that during the second quarter of 2016 (Q2 2016) more people are struggling to make ends meet. This is not only limited to lower income households, but higher income earners as well. This is particularly evident when looking at mortgage repayments.

Compuscan confirmed that the number of mortgages with adverse enforcements listed on them at the end of Q2 2016 increased by 26% quarter to quarter. This includes mortgages of R3 million or more, where people have been missing repayments.

Jacobus Eksteen, senior data analyst at Compuscan noted: “In the first quarter of the year, we noted that consumers were struggling to keep up with their vehicle and asset finance loan repayments. The fact that the seconds quarter’s data indicated that consumers were struggling to make their mortgage payments is extremely concerning. On the whole, consumers tend to prioritise their mortgage payments as this type of debt is usually taken very seriously by consumers. They have a lot more to lose if they don’t make payments on this type of account, so the trends we’ve seen in our data leads us to believe that consumers have really been feeling burdened financially.”

The mortgage stats

Between Q1 and Q2 in 2016, Compuscan revealed that the number of mortgages subject to adverse enforcements increased from 18,500 to 23,300. Furthermore, the number of mortgages that were three or more months in arrears increased by seven percent during this time.

However, while the strain is being felt across the board, Compuscan highlighted that lower income groups are feeling the pinch the hardest. The data revealed that about 39% of mortgages valued at R300 000 or less were subject to adverse enforcements by the end of Q2 2016. The table below reveals that a noteworthy percentage of higher value mortgages have also been subject to adverse enforcements:

Your home loan repayment plan

By extending your home loan repayment plan to 30 years, rather than 20 or 25 years, you will have a smaller monthly repayment (but remember interest adds up, so in the long run you would be paying more), thereby making it more affordable on a monthly basis. A 30 year bond will result in a 64% greater interest payable, compared to a 20 year option and may also be more expensive in terms of the interest rate you will be offered, stressed First National Bank (FNB).

However, FNB emphasised that taking out a 30 year home loan needs to be thought through very carefully.

“There are a few instances when having a 30 year bond will benefit property owners. However, while a 30 year bond period may seem attractive it is rarely in the financial interest of a consumer, unless the appropriate level of financial discipline is exercised. One of the times a 30 year bond would be financially beneficial is if the person is investing in property,” stated Tommy Nel, head of credit at FNB Home Loans.

FNB noted that it has started offering 30 year home loans in response to the needs of customers, however terms greater than 20 years are only offered to customers that are still able to afford the loan on the 20 year instalment.

Nel added: “We don’t allow term extensions on existing loans to more than 20 years for customers experiencing financial strain. When allowing the option on new customers we ensure that customers are still able to afford the loan on a 20 year basis. We don’t believe it is in the customers’ best interest to stretch their term past 20 years in an effort to try and make the loan more affordable.”

Vehicle and asset finance

The percentage of vehicle and asset finance (VAF) loans that were listed as three or more months in arrears by Compuscan in Q1 2016 was already alarming, considering the 19% from the previous quarter. This has increased by a further nine percent in Q2 2016, remaining a concern for Compuscan.

Eksteen said: “We noted that VAF loans of a medium value, from R101 000 to R250 000, had been subject to the highest percentage of adverse enforcements, followed by those from R250 001 to R400 000. Based on this information, we can fairly confidently surmise that even those who fall within higher income brackets are not necessarily coping financially. While there may be various reasons for consumers missing payments, it is likely that economic factors that affect the general cost of living have played a significant role.”

The below table illustrates that percentage of adverse enforcements against VAF loans:

Bad debt

The data revealed that the number of consumers declared to be over-indebted and part of the debt counselling process increased by eight percent (to over 158 000) at the end of Q2 2016 compared to the previous quarter.

Compuscan added: “There was additionally a six percent increase in the number of individuals whose worst position was an adverse status on one or more of their accounts, as well as a seven percent increase in the number of accounts that were three or more months in arrears. Rather notably, there was a 20% increase in the number of revolving loans with adverse statuses.”

Compuscan emphasised the importance of consumers prioritising their spending and staying on top of their needs versus their wants.

“Because there are consequences to skipping payments, including a decreased credit score, financial penalties, increased interest rates, legal action and an inability to obtain further credit, it is important that credit-active consumers place account repayments high on their priority lists. It is likewise important that they don’t over extend themselves by taking out unnecessary loans or by being dishonest during the affordability studies performed by credit providers when extending new loans,” stressed Compuscan.

Tips to manage your debt

Compuscan offered the below tips to help consumers better manage their debt:

1. Draw up a budget and stick to it. Include a debt checklist in order to prioritise which debts to pay off first.
2. Identify areas where you overspend and limit those expenses. Avoid spending money that you don’t have to on goods or experiences that are not absolutely necessary.
3. Close accounts that are unnecessary and that might tempt you to spend beyond your means. Make a decision to limit yourself to only a few accounts.
4. Contact your credit providers to negotiate your payment plan if you are in financial difficulty. Seek professional guidance on managing your debt if needed.
5. Get a copy of your credit report to assess your financial health. It is recommended that this is done on a monthly basis but should be done at least once a year.

Nel added: “Interest is only ever charged on the outstanding balance of your home loan, whether it is 20 years or 30 years. Therefore, if you can pay more than is contractually required you will bring the total interest down as well as reduce the home loan term.”

 Handy tip: You can apply for a detailed credit report from Kudough on Justmoney, alternatively if you are already struggling with debt, you can apply for debt counselling.