Surviving higher interest rates

[Dave A]

I was reading an article with some advice on how to survive higher interest rates, and thought it might be an idea raising it here in case anyone has any tips of their own.

The latest repo rate increase of half a percentage point - announced this week by Reserve Bank governor Tito Mboweni - takes the prime rate to 14.5 percent, which should make you think twice before you reach for your wallet this festive season.

What does the latest interest rate increase mean for you and what can you do to alleviate financial stress in the year ahead?

Needs vs wants
One of the first things you should do is draw up a budget that distinguishes between your needs and your wants. Your needs are essentials such as accommodation, food and electricity. Your wants are the things you would like to have, such as a big-screen television or designer sunglasses.

The prime rate has increased by a total of four percentage points since May 2006, when it was 10.5 percent. This might not sound like much to the uninitiated but it makes a significant difference to anyone who is paying off a home loan or any other type of debt.

Homeloans
As a rule of thumb, a 0.5-percentage-point increase will push up your monthly mortgage bond repayment by about R35 for every R100 000 outstanding on the bond, June Tudhope, the managing director of Nedbank Homeloans division, says.

Fixing your rate
You can fix your home loan rate so that you don't have to stress every time interest rates increase. However, the interest rate on your home loan is usually fixed marginally higher than the prevailing prime rate. So, although fixing your home loan interest rate does safeguard you in the event of any future increases, you may have to sit through more than one interest rate hike before your fixed interest rate is lower than your rate if you had left it to fluctuate.

Consolidation
It may be worthwhile to consolidate all your debt through your home loan because the interest rates on the latter are lower than those on other forms of debt.

You would then have to make only one loan repayment at the end of each month.

Emergency measures
Adams says Standard Bank will repossess your home or vehicle only as a last resort because the prices obtained are often at a discount to the property's normal market value. This increases the bank's loss, as well as the shortfall in the amount you have to repay the bank.

The arrangements the banks may offer you if you are finding it difficult to meet your home loan or car repayments include:

• Spreading the repayment of the arrear amount over an agreed period of time so that you can catch up on your repayments.
  
• Increasing the period of time over which you repay the instalments in order to reduce the amount you repay each month. However, the interest will be calculated over a longer period of time, which means your debt will be more expensive in the long run. To avoid the higher interest charges, you should increase your repayments as soon as you can afford to do so.
  
• Reducing your repayments for an agreed period of time, after which you must be able to meet the normal repayments. The bank will either extend the term of your repayments or will spread the outstanding amount over the remaining period of the loan.
  
• Suspending your repayments for an agreed period, depending on certain criteria being met. After this period, you must be able to meet your repayments.
  
• Surrendering collateral to the bank. Collateral refers to an asset, such as your car or house, that is used to secure a loan. If you cannot meet your debt obligation, the bank will sell your asset to recoup all or part of its losses.
  
• Assisting you to sell your property so that proceeds from the sale can be used to pay off your debt. However, if you are unable to meet your repayments in the medium term, it is better to try to sell your home or car under normal market conditions as soon as possible to get the best price and not to wait for the bank to repossess it.
  
• A voluntary debt review process in terms of which a debt counsellor will review your budget with you and choose a plan of action to help you pay off your debt.

extracts from article on Personal Finance here

So what tips do you have to reduce the impact of higher interest rates?

[duncan drennan]

A comment on fixing your bond interest rates: you cannot have an access bond and a fixed interest rate bond.

e.g. you might put any available money into your bond (to save some money on interest charges) and move it out when you need it. If you have a fixed interest rate bond you can only put extra money into your bond, you cannot take it out.

[Dave A]

Interesting note about bonds there, Duncan.

What interests me about that list is it is the kind of thing that works for salaried folk. For small businesses where you're surviving on drawings you're probably going to have to adopt some slightly different tactics.

[IanF]

As a business owner I just try harder with good service to keep our customers and look for the opportunities for if they come.

[Dave A]

Well there's one important tactic not so readily available to salary earners - improve your client base (and income).

[IanF]

Dave
I thought this was mainly a business owners forum or am I wrong?

[Dave A]

Business owners and managers in the main, Ian.

The idea is to mainly have discussions around South African business related issues. But there is plenty of lattitude...

Issues of business have become so intertwined with "non-business" issues nowadays. As examples, we're expected to counsel staff, which often involves their personal affairs. The long finger of politics now affects business right down to the small business level. Business is being lumbered with social responsibility. The list goes on.

[Marq]

Having rowed the debt boat hard and almost sunk, I think there is very little one can do besides

• Increase your income base (get a bigger/better/second salary or more sales)
• Cut your expense and life down to zero.
• Hope for an inheritance
• Hope for a rich rich uncle/sugar daddy/mommy to come along.
• Hope the banks leave you alone.

The big do not is

• Do not get into debt in the first place and if you do and get into trouble
• Do not get despondent and do not get downhearted
• Make a financial plan and a personal business/marketing plan and stick to it.

Easy to say - I know - but Banks, Creditors, employment people, friends and foes smell the fear and will leave you where you stand with promises that they will not fulfil.

These lists of 'helpful financial hints' invariable will get one into further trouble and delay the inevitable.
Consolidation - swops short term debt for long term debt.
Playing with spreads/time/reductions/suspensions all do exactly the same - they just delay the inevitable. The bank will want its money - all of it plus mega interest.

In my case the bank did none of those suggested items for me - They took judgement for the full bond amount taken out R350K, even though I only owed them R100k and had paid off a huge chunk. The also took judgement for the overdaft I had with them. The fact that they had not received three instalments in a row triggered this. I had written to them and lived on their doorstep giving them forecasts/budgets/business plans you name it they had it. All of this was ignored. Strange as it may seem the only helpful ones in all my debt problems was SARS. They agreed to write the interest portion off the amount I owed them and reschedule the capital due.

The judgements triggered garnishee orders for amounts that I could not afford at the time putting me into more debt as I borrowed to survive. Nobody in this process ever looked at my income and repayment abilities. A maintenance order (I was divorced thanks to financial problems created by my ex but thats another story) took care of the balance of my earnings.

When you are in this boat - nobody wants to know about consolidation/rearrangements or whatever scheme is out there.

The only way out for me at the time was to sequestrate - but then would lose professional qualifications, company ownership abilities and string of other problems.

While I was drowning my sorrows and wondering how life would be on a park bench - I met my current wife, Penny who didnt know the words debt or give up and she slowly helped me through. It took us seven years to get shot of those original debts. Today we do not owe a cent to anyone (well maybe the municipality for rates and eishscum cause they don't deserve to be paid)

What I learned from the money scenario was

• that cash is king
• do not get into debt in the first place
• if you must borrow make sure you have a sound plan to repay the debt or like a house make sure the capital value is way in excess of your bond.
• Save for the items you would like and don't buy because your friends have one.
• Watch the small debts because they can build into big ones quickly when you are in trouble and whole lot of them can create a desperate situation.

Emotionally and mentally I learned a whole lot more. Its definitely a strange time when you find out who your true friends are, what your family thinks about you and what your own weaknesses and strengths are. A big life lesson - in my case took far too long to process but eventually we came out the other side stronger than ever.

Its also great telling FNB where they can put their money.

[Dave A]

Emotionally and mentally I learned a whole lot more. Its definitely a strange time when you find out who your true friends are, what your family thinks about you and what your own weaknesses and strengths are. A big life lesson...

So true. So, so true!

Awesome advice, Marq.

[Chatmaster]

I feel this urge to share some of my OPINIONS so you guys that are more experienced in business can perhaps help my in my reasoning and improve my plan.

In 1998 I had to close 3 of my businesses because of debt in my 4th business. I was young and stupid with ambition to become super rich very quickly. I lost everything the following year and had to start all over again. My biggest mistake was not to build bumpers that were large enough and then take on debt to make money work for me. I guess as a business owner my moto has always been that money should work for me. Unfortunately this is only true if you have enough money to carry you for a length of time if things go bad.

My new slate works differently, I build a bumper that will ensure income for at least 3 years on my personal name. My business makes a loan from a bank (if necessary) and is therefore liable for its own debt, this ensure that my personal financial safety is secure and the bank carries the risks. If for any reason my business do head for trouble, I have the option to do a "Will it fly" on it and if I feel the business will make money if I reinvest, I would fund it for the duration I feel it needs to proof itself. If this fails, the business is shut down and I am personally still fine.

Increasing customers is one option, this will require additional funds for marketing and this should be kept in mind. Therefore the business itself needs a bumper account. This bumper account should be dedicated for increased marketing and infrastructure should there be a need to increase existing customer base or maybe to diversify your business with some lateral products or services. All of these might need additional funding and I see it as a requirement for any business to have reserve funds available for both.

To a degree I agree that a business shouldn't have debt in any case, but realistically this is a bit difficult to accomplish. A further important point to keep in mind is that for a good stable business it might be good to borrow money from the bank. Lets say interest rates increase to 24%. If I ad 30% profit on my product I sell, I make a profit with the banks money and have funds available for other projects. Just my 2 cents, would love to know what you guys think...

[Dave A]

My business makes a loan from a bank (if necessary) and is therefore liable for its own debt, this ensure that my personal financial safety is secure and the bank carries the risks.

This part troubles me. It is pretty rare that the business can get a loan without some individual being tied to the debt as well in the form of a surety.

I've been waiting on other comments before suggesting this, but your point about having a buffer brings up one of my thoughts.

One thing that has to be understood about banks and loans is that the saying "They'll give you an umbrella when the sun is shining and take it away when it rains" tends to be rather true.

So one of the strategies to consider is to increase your credit facilities (overdraft, credit card), but not access the funds unless you absolutely have to. Do not live on the edge of your liquidity.

Money is going to be tight so expect more difficulty in collecting on your debtors ledger. If you've got the capacity, extend your access to credit now, but have the self-discipline not to use it.

Apart from a rather trivial admin fee, the interest on money that you do not borrow (but still have access to in an emergency) is zero.

[Chatmaster]

This part troubles me. It is pretty rare that the business can get a loan without some individual being tied to the debt as well in the form of a surety.

This is definitely true for a cc. As far as I know with my one Pty none of us had to take any risks in the loan, besides it is forbidden in our memorandum that any director or shareholder does so. But then again my trust owns the share and not me personally, so I might be mistaken.

[Marq]

I agree - depending on how your companies are structured, there is very little likelihood that you are personally secure. Watch out for the surety clauses and the general stuff that allows the bank through into your personal life. Check out the 'piercing the veil' scenarios.

I don't think there is anything wrong with your overall game plan.

• I would fine tune it to allow a percentage of overall sales to go into marketing, creation of new customer base and research customer needs and product matches (a key to survival) - Not a special bumper account for marketing spend only. This also helps keep the big picture in site.
• Diversify, but stay close to the core business.
• Borrow money (for growth purposes) but keep short term borrowing for short term plans.
• Personally I have learnt that slow is good. Slowly slowly (softly softly) catchee monkey - Overtrading and diversification used to be one of the main reasons for businesses going under. I have not done any research lately but don't think this could have changed much.

Those are just my off the top thoughts for now.

[Marq]

This is definitely true for a cc. As far as I know with my one Pty none of us had to take any risks in the loan, besides it is forbidden in our memorandum that any director or shareholder does so. But then again my trust owns the share and not me personally, so you might be mistaken.

Ah there you go - a trust should keep them out of your life. A pty or cc will not. Good call.

I have a problem with trusts that I have not been able to overcome and that is the need for two or more trustees.
Right now I could have myself and my wife as trustees of the main family trust holding the shares in the businesses. If I decide to shuffle off this mortal coil - my wife has to team up with who knows what/who/whom to keep the process alive. For some reason I keep thinking of the financial wizard, magus heystack, who was apparently accused of wheeling and dealing as 'the other trustee' on his neighbours family trust. The story goes that the neighbours house went for a song and the buyer was...tra la.

So who do you/can you trust??
Maybe someone out there has an answer to this problem - its the only draw back that I see in the whole process.

[Chatmaster]

Personally I have learnt that slow is good. Slowly slowly (softly softly) catchee monkey

I couldn't agree with you more on that one! I have a problem with one of my business ventures atm. We have such a good and unique product that it can cause an explosion catching us with a lack of funds to keep it afloat when it does happen. One of our strategies is to roll the product out in stages to ensure healthy growth, but I am still concerned that it might cause us to look for a VC or maybe a bank loan. At this stage of the business it is not wise for us to go that route, but we will see what happens...

This is turning out to be a valuable threat for me, I am definitely not that clued up on legal aspects and am still learning new things. Like for example it seems I pay a bit more tax because of the trust owning a share in the Pty...