Switching banks to get a better bond can be to your advantage, but watch out for hidden costs, warns Belinda Beresford
You may not want, or be able, to move house, but it might be time to consider moving your home loan.
After all, you’re encouraged to switch insurance companies to take advantage of lower premiums, and to change to savings schemes with the greatest returns. So why not move to the bank offering the lowest bond rates? A difference of as little as 0,5% in the interest rate can amount to a sizeable sum over the life of your bond.
There is one big drawback to moving your home loan between banks: it costs money to cancel the bond and more money to re- register the new bond with another bank.
In addition, banks charge “initiation fees” and “assessment fees” for checking if the house is worth the cost of the loan.
As a rough guide, NBS Boland estimates the total costs of switching a loan is about R7 000 on a R500 000 bond and slightly less than R3 000 for a R100 000 bond. Not all this money goes to the bank. A chunk goes to the government and attorneys, and prices will vary depending on how friendly you are with your attorney and where you live.
Before moving banks, you have to consider whether or not the lower interest rate is going to outweigh the cost of switching.
Say you are two years into a 20-year mortgage for R100 000 and the interest rate is 23,5%. Your monthly repayments would be R1 977 and the total repaid would be R474 389.
If the interest rate was 23% you’d be paying R1 937 a month and the total cost would be R464 758.
Of course you also run the risk of seeing your old bank lowering its rates below those of the new bank. But if you’re a desirable customer – that is, you have lots of money and you are going to make extensive use of banking services – you may be able to talk a bank into giving you a lower rate for a fixed period.
Conversely, you may find no other bank wants you. NBS Boland’s Trevor Olivier says they are wary of people switching institutions because many do so when they are already in financial difficulties.
But in the United Kingdom and the United States competition between financial institutions means switching home loans is widespread.
A few years ago, in an attempt to build market share, banks were offering to pay the costs of switching to lure customers from rival banks.
But a merry-go-round of people moving institutions meant this practice has died down, although bankers say some institutions may still be prepared to swallow the costs to attract very desirable clients.
Among the few categories of home owners able to ignore the leaping interest rates have been those people who took out fixed- rate bonds, back when interest rates were in the teens rather than the twenties.
But fixed rate bonds are a gamble. You’re betting the interest rates are not going to fall. So the peaceful contentment of being protected from the blitz of interest rate hikes over the past few months can easily turn to discontent if interest rates fall, leaving you locked into higher rates for months, or years, to come.
If you’re convinced interest rates are going to stay below the level at which your loan is fixed, you can try to get out of the agreement.
Some banks will allow you to get out of a fixed rate bond early – at a price. Once you’ve bet against the bank on the direction of interest rates, the bank feels entitled to demand you pay to change the playing field, if you lose. For example, FNB’s Ian Jones says his bank is entitled to recalculate the entire interest on the home loan as if the loan had been at a variable rate from the beginning.
Other banks may charge a penalty of 1% of the outstanding balance, including capital and interest payments.
However, if in doubt, negotiate. Banks are fighting for market domination and are often willing to make allowances in order to keep good customers. For example, Jones says that he’s unaware of circumstances when FNB has invoked its penalty clause.
However, if more people decide to take fixed rates and then try to switch to variable rate loans, the banks may become firmer about enforcing their legal rights.
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