Frequent short-term borrowing could be a black mark against you when applying for a home loan.
“The number of short-term loans you burn through may warn banks or other lenders that you’re having trouble managing your finances,” says Renier Kriek, Managing Director at disruptive home finance business, Sentinel Homes.

That can make them reluctant to fund your dream of owning your own property.

Easy debt
While all debt should be managed responsibly to maintain a good credit score, for many South Africans, short-term loans are becoming an addictive way to make ends meet. Or, to fund luxuries they can’t afford but refuse to live without.

It’s tantalisingly easy to get hooked as well - you don’t need to put up collateral to get one and you don’t have to explain what you’ll use the money for. Also, some like to think that if they fall behind on their repayments, they can simply submit themselves to a debt review.

Introduced by the National Credit Act, a debt review is a legal process for someone who is over-indebted to settle with their creditors by paying what they can afford. A registered debt counsellor will review their finances and help them create a repayment plan.

The hidden costs
Unfortunately, there’s no such thing as a free lunch. Short-term loans can carry much higher interest rates than other types of debt - up to 5% per month, which is around 6 times the current prime rate. “So, the more you borrow, the worse off you become financially and the more likely you are to default,” says Kriek.

That debt review “solution” you are being offered isn’t necessarily a safe bet either - because it will cut you off from any further credit provision for as long as it takes to remedy your past bad behaviour.

Even if you’re not a repeat offender, firms offering debt counselling will often assure you that your debts will be forgiven, the slate is wiped clean and all will be forgiven. “In the real world, lenders could deny your home loan application simply because you needed debt review in the first place,” says Kriek.

Alarm bells
Short-term or unsecured loans are not an evil to be avoided entirely. They’re actually good for the economy when used responsibly.

However, they’re also a red flag to home loan providers when they feature strongly in your financial history, even if you’re keeping up with repayments.

Credit providers use various risk models to identify patterns in our spending behaviour - good and bad. They know what financially responsible and irresponsible spending patterns look like.

“Frequent short-term loans - with or without defaulting - are a risky pattern that implies an individual does not manage debt well, and that is something a home loan provider does not want to make a long-term investment in,” says Kriek. “The ability to delay gratification is the underlying attribute that responsible users of credit have, but there is no easy way to quantify whether a particular applicant possesses that trait – the number, frequency and type of unsecured credit transactions is a useful proxy in that regard.”

Good debt
So, what is the right course of action, especially if you already have short-term loans?

First, understand that short-term loans have their place but are seldom necessary. Stop using them and make a plan to pay off the ones you already have. Then get to work on building an emergency fund of cash that can only be touched for true emergencies, so that you will not need unsecured debt in those cases.

Second, work on saving for luxuries such as holidays and large capital purchases. You will be paying monthly anyway, whether you take the credit or save, but in the saving scenario interest will be working in your favour rather than against you. Delaying the gratification of that large purchase is difficult, but no-one said adulting would be easy.

Finally, if there is no other option, opt for “good” debt as far as possible. Buy your clothes, furniture, appliances, groceries and other items using store credit if you absolutely cannot do without. You don’t have to buy things you don’t need to build a good credit score. Everyday items and normal household purchases are fine.

“Credit providers’ risk algorithms generally look favorably on consumers who start their credit journey with store debt because it fits the pattern of responsible spending, provided you pay your accounts on time, of course, and do not spend near or above your credit limit,” says Kriek.

Long-term planning
Eventually, most people end up before a home loan provider in the hope of buying a house they love. But lenders are profit makers and risk reducers, so it’s important to think like they do.

Are you a good investment? Will you repay your home loan on time and in full? The lender’s modern analytical systems - often powered now by artificial intelligence - evolved to answer questions like these and exist to protect their owner from risk.

“Short-term loans that literally fund your lifestyle can easily sway the algorithm against you,” says Kriek, “especially if you are funding luxuries or nice-to-haves from easy debt rather than developing the discipline of saving.”
 
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Recently, the South African Reserve Bank reduced the repo rate by 25 basis points but the real interest rate remains far too high to spur meaningful capital investment by South Africa’s private sector. While the news brings some welcome relief to property owners, it’s another disappointment for the country’s real economy.

This is according to Renier Kriek, Managing Director at Sentinel Homes. “The SARB has consistently preached that their policy bible contains only one chapter, titled ‘inflation targeting’, which requires sticking to within their 3–6% inflation target band and anchoring inflation expectations at the 4.5% midpoint,” he says.

“Their messaging has consistently and unfailingly pledged that their mandate is the only consideration that guides their decisions.”

False policy
Yet, inflation has remained low over an extended period, currently sitting at 2.8%, leaving the opportunity for a softening of monetary policy wide open. Why then has the SARB stubbornly refused to reduce the interest rate accordingly, even as inflation hovers at or below the bottom of their target band?

Despite preaching vague and opaque ‘risks to the upside’ to justify their hawkishness in recent years, it’s clear that the  SARB has been disingenuous – in short, they have been lying to us. That was made plain for the first time today, but it has long been evident there is a secret driver of their decisions.

“It was clear with the announcement that the SARB’s policy bible has contained a new chapter, which is their anticipated future mandate, and they have already been guided by that expanded gospel, despite the existence of the chapter having been secret and further despite the content of the chapter not having been agreed to with Treasury and other stakeholders,” says Kriek.

Why now?
The argument advanced by the Monetary Policy Committee, by way of Governor Kganyago’s statement and answers to questions during the press conference, is that the MPC wishes to deal a decisive blow to inflation in the long term, transforming the SA economy to a low(er) inflation economy.

This will also mean lower interest rates for longer in future, per the MPC’s reasoning, since lower inflation economies generally tend to have lower inflation rates.

“However, the question is why do we want to do this now?” says Kriek. “Moving to a lower inflation target will likely have long-term positive consequences for the SA economy, but it will also involve near-dated discomfort. Essentially, the MPC is promising short-term pain for long-term gain.”

“The SA economy is a very frail patient at the moment and keeping interest rates at current high levels in order to achieve longer-term outcomes is a risky gambit. We should at least be asking, and this is as much about political calculation as economic policy, whether we should not attempt monetary stimulus first, getting the economy out of its bandages, and attempt the MPC’s incisive reforms once the patient is back on its feet.”

Impact of delinquency
The property sector has shown signs of broad-based recovery, with price lines across all the metros trending upwards in Stats SA’s latest Residential Property Price Index.

The cumulative 75 bps cuts, with a further cut at today’s meeting, have already had the effect of bringing previously pent-up demand spilling into the residential property market. However, while these are green shoots, the market is still under significant strain.

According to National Credit Regulator statistics, home loan delinquency is up 35% in the last 3 years, signifying the tremendous pressure households are experiencing related to their finances.

“This sharp increase in delinquency will come home to roost soon, as a sudden influx of distressed stock in the market is likely to drive prices down in the face of relatively tepid demand,” says Kriek.

A small window of opportunity
Households seeking to enter the market should not delay any further. The MPC found that a neutral policy should be 25 bps lower than the new repo rate of 7.25%, meaning we can expect at least one more cut in the near future.

So, it is more likely than not that the upwards momentum evidenced by the aforementioned green shoots will be sustained and expanded as the market adjusts to lower rates.

The decision at the next meeting will be led by the MPC’s insistence on pre-emptive management of monetary policy through its anticipated new mandate, and so the CPI inflation reports from now until the next meeting in July 2025 will have to be watched closely.

“It seems that if inflation inches higher even slightly, the MPC’s overly hawkish instincts will rule decision-making at the next meeting, favouring keeping rates steady despite low employment and flaccid economic growth,” says Kriek.

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It's not easy to get a mortgage on your dream home if you're not employed full time and earning a fixed salary. Freelancers, those working on commission or sourcing their income from gigs, and many other independent earners, often find themselves facing a brick wall when applying for a home loan from banks.

However, more people than ever are becoming self-employed in these fields and are seeking easier alternatives to a traditional mortgage bond. This is according to Renier Kriek, Managing Director at Sentinel Homes, which specialises in financing home ownership through instalment sale agreements.

How does it work?
"Instalment sale agreements are steadily becoming popular not just among those that do not qualify for a bond but also many who do not fit the salaried mould for which the mortgage model was specifically developed," says Kriek.

An instalment sale makes acquiring a home similar to buying a vehicle on hire purchase. In Sentinel's case, the company finances the purchase and the buyer repays the value of the property in monthly instalments.

Although the company holds the title deed, the buyer enjoys all the rights and responsibilities of ownership during the period of the contract. Once the purchase price is repaid in full, total ownership is transferred to the buyer.

"On the surface, there is little difference between buying with a bond or via an instalment sale," says Kriek. “The only practical difference is the procedure followed when the buyers do not pay their instalment, but even in that case, an instalment sale is to their advantage.”

However, an instalment sale agreement offers several advantages to this class of homeowner.

Improved affordability
Because a freelancer or a self-employed person’s income may vary from month to month, the bank will only consider a portion of their earnings. So, even if they qualify for a home loan, they will likely have to settle for a cheaper property or fund any shortfall on the purchase price themselves.

Through an instalment sale, up to 100% of their income is assessed. “This gives the purchaser more freedom to choose a property they really want,” says Kriek.

Improved credit score
An instalment sale allows a buyer to acquire a valuable asset sooner and improve their credit score in the process. As the property’s value increases and their financial position grows over time, they may become a more attractive borrower. And they do not risk being caught in a rent trap while the values of homes continue to increase.

"Many of our clients have been granted bonds on the basis of their instalment payment history and were able to settle our instalment agreement early from bond refinance," says Kriek. “You can never get on the property ladder soon enough.”

Lower default risk
When a borrower defaults on their mortgage, they face losing their property through a sheriff’s auction, having adverse judgements against them, and being blacklisted for 5 years or more. This impedes their ability to acquire another property and obtain any credit, and may even limit employment opportunities.

However, with an instalment sale agreement, they have more options, including negotiating their position and, ultimately, selling the property to pay off their debt. "Even then, they retain a clean record and we have assisted clients that eventually recovered from such a position to buy another property," says Kriek.

Protected by law
As with a mortgage, the contract is governed by the very comprehensive National Credit Act. Another law, the Alienation of Land Act, also applies, ensuring the rights of the parties to the agreement are fully protected. Instalment sales are also registered against the title deed of the property.

A growing market
As more people start to freelance or work in other independent fields with irregular income, owning a home through an instalment sale agreement promises a logical alternative to mortgage bonds.

"It is apparent that an instalment sale agreement offers better advantages, more protection and greater flexibility to those who dream of owning a home without sacrificing their financial independence," says Kriek. “The offering is available via mainstream intermediaries, so be sure to ask your bond originator or estate agent about this currently lesser-known financing option.”
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MEDIA CONTACT: Rosa-Mari Le Roux, [email protected], 060 995 6277, www.atthatpoint.co.za 
For more information on Sentinel Homes please visit:
Website: www.sentinelhomes.co.za
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