August 2008

Surviving the tough times Part 2

With high interest rates, servicing debt has become a number one concern for South Africans. Next in line is finding space in the budget for transport costs, with a petrol price that has seen better days. Here is some perspective on managing these two areas that have put many people's finances under strain.

Debt management

Your home loan is most likely your greatest debt. You may have other debts, and they are probably also a cause of concern for you in the face of high interest rates. When it comes to getting through a tough economic time, the first and most obvious point is: don’t get yourself into further debt! This is not the time to buy items on payment plans if you are already battling to pay off a house and a car, for example.
 
Let's look at home loans first. Your house is most likely your greatest asset. Hold on to it if you can. Unfortunately, the high interest rate has pushed home loan repayments out of the reach of many bondholders. There's even a term for this –"mortgage stress" – and thousands of South Africans are suffering from it. Many have been forced to sell, sometimes for less than what they bought the house for, because of the decline in property prices.

There is a way to handle mortgage stress, and that is to talk to your bank (with whom you have your home loan). Banks are fully aware of the fact that rising interest rates have a negative impact on repayments. They have entire departments and procedures in place to handle this very real fact of life. You need to contact them immediately you see a problem with your repayments (the golden rule here is to act fast, before the situation gets out of control).

Approach your bank on the basis that you are willing to find a solution together with them. They are more likely to help you if you have a co-operative attitude. Banks take each case on its own merit, and there are a variety of options they can give you, such as a breather period of three to six months, or an extension of the home loan term. If you extend your term from 20 to 30 years, for example, your monthly repayments will reduce. (However, if you take this option, remember it's only to get you through this tough time. As soon as interest rates start coming down, shorten your home loan term again, because the sooner you pay off your home loan, the more interest you'll save.)

When it comes to your other debts, such as credit card debt, a car loan, or store cards, you might want to consider consolidating all this debt into one loan – your home loan. Many banks offer this service, and because your home loan generally charges the lowest interest rates, you will find yourself saving on interest.

How much for a tank of petrol?

Several factors affect the oil price. Commodity trading, supply and demand, production quota, oil reserves, and crises in oil-producing countries are the main factors that cause the fuel price to escalate. The actual impact of each factor is quite complex and it’s seldom just one thing that causes the fuel price to spike. These are factors that are completely beyond our control.

What we can control though is how carefully we use petrol. A recent survey on the Finweek website asked "Has the escalating petrol price affected your mode of transport?" Sixty-two percent said it hasn't, 26% said they had bought a bicycle, and only 12% said they were considering a lift club. This is quite a startling result. In theory, we should all be considering ways to share transport, but often it is our independence that we fear losing.

There is no better time than now to start thinking about using petrol more wisely than before. Not only is oil an increasingly expensive commodity, it is also a non-renewable resource (i.e. it could run out sometime in the future), and it is also a pollutant. For the sake of our budgets and our environment, careful thought and planning around our petrol usage is essential. The money you save from belonging to a lift club can be used to service your bond.

Next issue: Should you cancel your insurance when your budget is under strain?

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