Interest Only Bonds – Commercial Property

How do I reduce my monthly bond repayments?

Are your bond repayments too high? Tenants not paying rent? Vacancies increasing? Sounds like you need to
reduce your monthly bond repayments. It is possible to reduce your bond repayments by up to 32% per month and free up cash to get your business cash flow out of the red.

This is how – Interest Only Bonds 
Your bond repayment is made up of two main components: capital and interest. The capital amount is the loan amount you took out with your financial institution.

Interest is calculated as a percentage of a loan (or deposit) balance, paid to the lender periodically for the privilege of using their money (The Balance)

So, if you remove the repayment of the capital amount and only pay interest, then it is possible to reduce your
bond repayments by as much as 32%. The reduction in repayments is dependent on the interest rate you are currently paying your bank. The good news is, the interest rate is at an all-time low as a result of the economic turmoil caused by the coronavirus pandemic. Bad for investors, relief for property owners. Back to interest only bonds. The capital amount can be paid back at the end of the loan term.

Here is an typical example (subject to lenders conditions) that outlines the potential cashflow saving:

Traditional Capital and Interest Repayment Model
Bond                     R 50 million
Term                     10 years
Interest                 Prime plus 1 % ( 11.25 % )
Repayment           R 695 844 pm

Interest Only Model
Bond                     R 50 million
Term                      5 years ( plus 5 years if account handled well)
Interest                 Prime plus 1 % ( 11.25 % )
Repayment           R 468 750 pm

This equates to a 32% improvement in cash flow – R 227 094 pm x 12 =  R  2 725 128 pa. Capital Repayment – R 50 million at year 5, or rollover if the lenders is happy to refinance.

Types of properties
The ideal types of properties for this financing solution are income-producing commercial, industrial or
residential properties (blocks of flats, hotels, student accommodation), valued at between R 20 million and
R80 million.
If you have a property valued at more then R 80 mill, it is possible to structure the funding in an alternative
manner. The property must have been owned for at least 2 years and have some equity available.

Risks
As a borrower, your risk is reduced because cashflow is improved. With a positive cash-flow you have
funds to buffer your business against any unforeseen circumstances, such as COVID, other natural or
man-made disasters.

How may I use the cash saved?
The cash you will have freed up can be used for other investments or as the property owner requires. The borrower
must, however, remember that at year three to five, the capital has to be paid back. This can come from
the savings made in cashflow, from bank loans, other businesses or even the Interest Only Bond holder,
could refinance or roll-over the loan.

How long does it take to set up the Interest Only Bond?
The lenders need all supporting documents to prepare a submission. The proposal is submitted to the credit committee for assessment. If all in order, then a valuation of the property is done and the final term sheet is presented to you. This normally takes 2 to 3 weeks, measured from when ALL the requested supporting documents have been received.

What are the costs?
The interest rates charged are market related. Rates from prime plus 1% to prime plus 3% are available. This is risk dependent. The current bond on the property would need to be cancelled and a new bond registered. There may be bond cancellation costs and there will be bond registration costs. There are also the normal administration and raising-fee costs.

  • Main Advantages
    Companies wanting to grow their property portfolios can use this finance facility to purchase more
    property.
  • If there is equity in the property, it is possible to release this equity.
  • Cash-flow is improved. Reduction in monthly payments of up to 32 % are possible.
  • Reduced interest rates. Some property owners are paying rates in excess of prime plus 5 %. There are
    savings to be made using these commercial bond facilities.

 

For more information visit https://nhfinance.co.za/interest-only-bonds/

Has Covid-19 Impacted Your Income?

When we rang in the New Year, who would have guessed we would face a global pandemic that would creep into every country and continent across the world. That some of us would lose businesses, lose our jobs or take massive salary cuts. We are living in extraordinarily difficult times.

The business gurus and commentators say there is a new ‘normal’ we all need to get used to which includes working from home, working in shifts or teams and often as a result, reduced hours. Unfortunately, this new way of doing business has resulted in company retrenchments, dismissals and forced resignations across almost every industry, with some being harder hit than others. As of today, hair & beauty salons, restaurants, certain manufacturing concerns and gyms to name a few can only operate under reduced capacity and with major restrictions in place. Many businesses have been unable to bring in an income since lockdown in South Africa started on 26 March 2020.

When faced with this situation, UIF registered employees can claim from the Unemployment Insurance Fund. The problem with UIF is that it does not pay out the full wage or salary. This leaves an income shortfall. Families expenses are generally fixed and there is very little opportunity to reduce monthly living costs. For example: school fees, rent, bond repayments and food are all fixed costs.

The good news is that there are a number of temporary financial solutions available to the public:

1. Pension Loan
If you have given notice to your pension fund or provident fund that you want to make your policy paid up, it is possible to secure a short- term Pension Bridging Loan from accredited private lenders.
2. Property Secured Loan
If your home is bond-free or has a bond that is less than 40% of the property value, it is possible
to secure a Loan Against the Property  in some circumstances, to help you free up cash to cover expenses.
3. Loan Against a Movable Asset
It is possible to use your valuables like gold, diamonds, art, antiques, jet skis, cars, bakkies, motorbikes and other loose assets, as security for a loan.

When faced with the daunting prospect of retrenchment, do not panic. There are temporary financial solutions that enable families to make it through the tough times. For more ideas and financing solutions click here: www.nhfinance.co.za