Due to the restrictions imposed by the government to manage the impact of the coronavirus on our health system, you may be wondering about how you could ease your cash flow during the Covid-19 lockdown. You may be in a position where your income has been temporarily reduced and you may be looking to reduce your cash flow wherever possible with minimal impact.
Below are some options and summary guidelines on what to look for when making your decisions.
Review your investments to ease your cash flow during lockdown
Typically, the first thing you might think of when easing your cash flow is suspending your investments. Before you make a move, speak to your financial advisor about reviewing the contracts and your strategy. Some contracts will have no charge for amendment, but others may incur a small admin fee, while some may even incur a large penalty against the investment value.
There are likely to be many options for you to make use of. However, it is important to take the time to research the details while remaining aware of your intended outcome before deciding what, when and how.
Review your life insurance for some cash flow relief
Life cover, capital disability, critical illness/trauma cover and income protection can all be reviewed during this time. Most of the major insurers will allow some sort of premium holiday – usually for 3 months. A premium holiday will allow you to resume paying your premiums thereafter with no penalty and no restriction on your cover. There are pros and cons to this solution:
Positives
- Cash flow relief
- No loadings or restrictions on your cover when you resume paying your premium
Negative
- You will not be able to claim during the 3-month period
So be sure to carefully review what cover you are suspending and be fully aware of how this could affect you and your specific requirements.
Review your short-term cover based on your circumstances
Your short-term cover relates to your home and car insurance. During lockdown, the risk to the insurers of paying a claim is lower so some insurers are happy to reduce premiums by as much as 20% without any reducing cover. You can also think about reducing the cover you have on your vehicle if it’s parked in your garage all day. Speak to your financial planner about getting a review of the risks and benefits of this.
Review your home loan to ease your cash flow during lockdown
The banks are offering a three-month payment holiday or a credit facility to pay your bond payments for three months. FNB, Absa, Nedbank and Standard Bank all explain how you can make use of these offerings on special Covid-19-related pages on their websites.
Payment holiday
Let’s use the example of a 20-year bond on a R3 million property with an interest rate of 8% and repayments at ±R25,000 pm. By taking a three-month premium holiday from month 91 of your term, the additional interest cost will be ±R132,000 and the payment term will extend by 8½ months.
Positives Negatives
Simple Interest expense
Cash flow Longer term
Credit facility
Alternatively, you could take out a loan to cover the three-months’ worth of repayments in the example above. You could, for example, borrow R76,500 to pay for 3 repayments and repay this loan over 60 months. It will cost you ±R16,500 in additional interest, and you will be required to pay ±R1,600 pm for 60 months to repay the loan.
Positives Negatives
Lower total interest Additional expense for 5 years
Does not increase your long-term loan period Administration to set up
Each option will suit a different situation and needs to be assessed for you personally. If you are further into your home loan, then the impact of a payment holiday is less. On the same loan facility, but taking a payment holiday from month 216, the interest cost is ±R17,000 and extends your payment term by 3,5 months. In this scenario, the payment holiday is the better solution.
The illustration below shows the total interest paid over the options mentioned in the above your home loan facility.
Ryan Winter CFP® is a wealth manager at Netto Invest.
By Ryan Winter, CFP®
B.Com
