Home owners often feel the interest rates of home loans are out of their control, and subject to how generous the South African Reserve Bank will be in dropping basis points. Picture: iStock
Reducing your interest rate on a home loan is an option many homeowners should explore, especially if they are a loyal customer with a good credit profile.
In an interview with Moneyweb’s Nompumelelo Siziba, conveyancing attorney from WDW Inc, Meyer de Waal, explained that there are ways to renegotiate your home loan interest rate, but that this is on the customer to initiate this process.
He said there are three elements which are critical in assessing your home loan.
The first is your credit profile, which is risk-mitigation for the bank.
“If your credit profile is not so strong, the bank may add 1% or 2% on top of the prime lending rate – 7% at the moment – to add in a little bit of insurance that, if you default, they have some cover,” De Waal said.
The second element is your affordability, or your ability to repay your home loan without fault every month, in addition to your debts and living expenses.
The last is your loan value, relating to whether you are putting down a deposit, or applying for a home loan.
If you can contribute a deposit, this is a good sign for the bank, but for first-time buyers, that is not always an option. However, they can enlist the service of a government subsidy called the Finance-Linked Individual Subsidy Programme (FLISP).
First-time buyers earning between R3 501 and R22 000 are eligible to apply for the FLISP subsidy, De Waal explained.
This is subject to having your home loan approved, the home loan coming from a traditional bank, if you have a financial dependant, and if you are a South African citizen.
Those earning R3 500 qualify for about R120 000.
De Waal said that FLISP is “a fantastic opportunity for first-time buyers to make use of”.
“That subsidy can be put down as a deposit and with that deposit, then renegotiate a lower interest for your home loan.”
Home owners often feel the interest rates of home loans are out of their control, and subject to how generous the South African Reserve Bank will be in dropping basis points.
However, home loans differ from other investments, such as vehicle insurance, because if you have a good insurance broker, as the value of your car reduces, your payments to your insurance go down, De Waal said.
Banks will not approach customers and say, due to paying your bond without fail for years, and your affordability and credit score improving, your home loan will be reduced.
“No, you have to sit and wait for the Reserve Bank, and the bank will actually (I call it) trap you for 20 years in the high interest rate.”
An interest rate of prime plus two will cost a home owner 32% more for a property being paid off over 32 years, De Waal revealed.
“So my recommendation to every homeowner is to do your homework first, make sure that your credit score is good, your affordability is good, and go back to your bank and renegotiate your interest rate,” he advised.
If you approach your bank and secure a home loan, and ensure you have a good credit score, you then have an opportunity to “be little bit cheeky” and ask them to consider reducing your interest rate.
If your bank refuses to readjust your interest rate, De Waal strongly recommends going to another bank, “because this bank is clearly not loyal to you as a customer”.
De Waal’s argument is that another bank may show more loyalty to you.
This renegotiation process can be made easier by hiring a conveyance attorney. Although there are fees involved, “paying legal fees will be a small drop to pay and to sacrifice”.
Many of De Waal’s clients have successfully renegotiated their interest rates, even after just one year of paying their home loan.
“People are switching from one bank to another bank on a regular basis… [T]he banks are hungry for other business.”
Mortgage originators have an agreement with banks not to be involved in switching home loans. De Waal said you have to approach your bank’s home loan department directly, or go to the home loan department of another bank, and say your bank is treating you “badly”, and ask if they would have you as a customer.
However, De Waal emphasised that you must continue to pay the bank the home loan over the same period of time you applied for, “because, if you do stretch your home loan for another five or another 10 years, that becomes one of your most expensive credit agreements if you start stretching your home loan”.
There is also an option of stretching your home loan for lower monthly repayments, which could add thousands of rands to your home loan.
“So always have the discipline to pay back the loan in the same amount of time. So continue to pay it, but pay it bank into a home loan as an extra payment, then you’ll see how quickly you pay off your home loan.
“And then you get the double benefit of a lower interest rate, plus paying back your home loan much faster,” De Waal advised.
This article was compiled using information revealed in an interview on Nompumelelo Siziba’s SAfm market update with Moneyweb. Listen to the interview below:
(Compiled by Nica Richards)
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