Stressed out? Playing for time when you have a home loan but no income

Warren Ingram explores the options, focusing on case study of guest house owner whose investments equal outstanding bond amount.

As the Covid-19 pandemic bites, many struggling home owners are faced with difficult decisions.

Sell for a quick financial fix or cash up any investments towards paying off a bond?

Bruce Whitfield received a letter from a 71-year-old Cape Town woman who generates income from her guest house.

She's had no paying guests since March.

"I have an access bond of R1.7 million which expires in two years' time and I owe R500,000. I live off the bond and my investments are around half a million rand."

What should she do?

The advice from her tax adviser is to cash in her investments and settle the bond.

Personal financial adviser Warren Ingram says this is great advice, in most instances.

Why have investments that may or may not be growing dependent on what the economy's doing, what the markets are doing, whereas you've got a bond and that interest rate that you pay on the bond is a guarantee... The only reason the rate changes is because the Reserve Bank changes their rate, so that's a known.

Warren Ingram, Personal financial adviser and executive director - Galileo Capital

... especially because a lot of mortgages have a time frame on them. There's a certain age where they just won't extend a mortgage and I think this person is in that case now.

Warren Ingram, Personal financial adviser and executive director - Galileo Capital

However, that means settling the bond and "hoping for the best" when hope is never a great investment strategy!

What's bothering me is if that guest house doesn't start generating income soon, unfortunately this person is going to start drawing on the bond again and now have no other resources to keep paying up the monthly requirement.

Warren Ingram, Personal financial adviser and executive director - Galileo Capital

Ingram sketches the "terrifying scenario" of being at the mercy of a bank if making the required payments is not possible.

He brings in the strategy of playing for time, which starts with finding out the minimum monthly payment required on the loan.

Use the investments just to pay that minimum payment... hoping that in the months ahead the tourism industry opens up a bit more.

Warren Ingram, Personal financial adviser and executive director - Galileo Capital

Ingram also elaborates on other scenarios involving different age brackets and financial circumstances.

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