The people of South Africa are faced with very uncertain times ahead, due to the nationwide lockdown and sovereign credit rating downgrade caused by the recent COVID – 19 pandemic.
A lot of people (Clique members and friends) are seriously concerned about the recent events and how it’s going to affect their lives going forward. As a result of the strain this has caused on a lot of people’s disposable income, most financial institutions have since opted to grant some of their clients various cash flow reliefs. Most have come in the form of payment holidays, reduced instalments and/or more flexible payment terms. The South African Reserve Bank (SARB) has also decided to reduce the repo rate by a further 100 bps (1%) to 4.25% bringing the prime rate down to 7.75%
Just as an emphasis on the severity of the current economic conditions caused by recent events, since the first COVID – 19 case reported in SA, SARB has reduced the repo rate by 200 bps (2%). In the past, SARB rather decided to maintain the repo rate or approve small cuts even though the economy was struggling and entering into recession in some quarters.
To stress the point even further, SARB has revised their GDP growth targets from 0.2% to -6.1%
We want to discuss 2 hot topics that are current amongst our members and the general South African community/society:
- COVID 19 cash flow relief offered by banks;
- What does the deduction in repo rate mean for the average person?
Before diving into the details, we must mention that we are NOT REGISTERED FINANCIAL
ADVISORS. With that said, we recommend that you first speak to your financial advisor or seek
the guidance of an appropriately approved/authorised person before acting on any of the items
COVID 19 Cash Flow Relief – Payment Holidays:
to be addressed below. We have merely shared our views based on our own experiences as Clique members purely for the purposes of trying to educate our fellow brothers and sisters.
The phrase “payment holiday” (also known as moratorium) sounds like music to most people’s ears – especially if you’re currently facing quite large debt exposure. Payment holidays are designed to give you temporary relief while you’re experiencing cash flow constraints. (E.g. say you get a 90 day payment holiday, from May 2020 to July 2020. This means that you don’t have to make any repayments for this period. However, interest will continue to accrue on your balance and your loan will still be repayable over the initial same period)
Now the real question: whether or not one should make use of the holiday, should they be offered the option?
We unfortunately cannot answer that question for you, but we can highlight to you what it is we think you should consider in making your decision. The truth is that whether or not you make use of it, is entirely dependent on your current financial position.
The best way to highlight this is to provide you with some Pros and Cons of payment holidays:
| Pros of Payment Holidays | Cons of Payment Holidays |
| Taking off some financial pressure in the short- term – You may have lost your job or just have tremendous financial problems but with the hope that they are short term (i.e. “more month at the end of the money” type of situation) | Higher payments after the holiday: – Your future repayments post the holiday will inevitably be higher as the remaining balance still needs to be paid over the same remaining term. Remember this is only a payment holiday and not an interest holiday |
| It’s much better than falling into arrears. – Being in arrears could attract penalty rates; – Normally payment holidays negatively affect your credit profile, however, due to the nature of the current circumstances, institutions have issued statements saying that they would not go the route of letting it affect your credit profile. (Please ensure that you read through and thoroughly understand the terms of your payment holiday) | Increased Interest: – Your future repayments post the holiday will also be increased by interest (i.e. interest is calculated on outstanding amounts which still accrues even while on holiday.) |
All of the above sounds pretty straight forward, however let’s give an actual example with numbers to see the effect this would have on your exposure:
Assume you have a mortgage bond with the following terms:
Principal Amount: R600 000
Initiation Cost: R6 037.50
Duration: 20 years (240 months)
Effective Date: 01 Sept 2018
Interest Rate Applicable: Prime Rate (assume 10%)
Repayment Frequency: Monthly
Monthly Payment Including Service Fee on Month 1: R5 917.39
