Shaun Harris
TAKING STOCK
Buying property and the costs associated with a mortgage bond is a touchy subject. For many people buying a home is their biggest investment, and the process of securing home loan finance can be traumatic.
When something goes wrong – sharp interest rate hikes, or personal financial circumstances forcing a homeowner to miss a payment – people are often left feeling that they are up against a huge and inflexible system. There’s a vague feeling they are being ripped off.
It’s a sensitive issue for the retail banks too, which often complain of unfair “bank bashing”.
But while banks will generally be sympathetic to problems faced by bondholders and claim greater disclosure of costs, they still have a lot to answer to – particularly when it comes to home loans, an important and lucrative area of business for the retail banks.
For example, how many homeowners know they are being charged a monthly administration fee or an annual “custody fee” for holding their title deeds? Then there’s homeowners’ comprehensive insurance, which some banks bill in advance and then charge monthly interest on the reducing balance over the course of 12 months.
Most bondholders probably don’t even know about these charges, and it’s unlikely they will find them in their bond account statements. These hidden costs are often simply lumped into monthly repayments. Increasingly, consumers are not only questioning interest rates, but also asking really basic but important questions. Like why is the rate charged on home loans linked to prime? The reason seems lost in the mists of time. And why do local banks enjoy an average margin of between 4% and 5% while their counterparts in the United States and United Kingdom do profitable business on a margin between 2% and 3%?
The issue of hidden costs was sparked off by one of the retail banks, which said it seemed that South African Home Loans, a competitor clearly getting up the noses of the banks, was charging an administration fee in excess of the maximum prescribed in the Usury Act.
But Simon Stockley, chief executive of South African Home Loans, explained that his company combines the administration and valuation fee on quotations. Then he suggested that the costs and fees charged by the retail banks on home loans might warrant a closer look.
Not all banks charge the custodian fee for keeping your title deeds, but some do. It ranges from about R20 to R35 a year.
All charge for homeowners’ comprehensive insurance – some only annually, which leaves the bondholder paying interest on the money advanced to them without their knowledge. Most banks have a monthly option, but don’t always tell you about it.
The really contentious issue, though it remains to be tested in the courts, is the “threatened” penalty for homeowners who cancel their bonds, particularly those on fixed interest products.
After the interest rate spike last year just about all the banks brought out fixed interest and step-down products. It’s hard to fault the concept, but what happens to the bondholder who locked in at 18% or 19% and now wants out? In theory they face penalties for opting out early, which vary enormously between the different banks and in some cases are not even quantified.
Interesting here is that when a homeowner takes a favourable fixed rate in a rising interest rate environment, the bank can cancel the contract if a repayment is missed. But it does not happen in the opposite scenario. Instead the client is threatened with a penalty – three months’ instalments seems fairly standard – if they want to end the contract and secure a lower interest rate.
But these penalties are still to be tested legally, and a recent incident in the UK sets an interesting precedent. A client who had taken a 10-year fixed mortgage rate with NatWest in 1994 wanted to switch to a cheaper rate. NatWest charged the client a penalty equal to six months’ interest payments and the client took the bank to court. But before the hearing NatWest settled out of court, refunding the penalty and legal costs – on condition the client dropped the case.
Let’s see what happens here. The important point is to ask your bank manager exactly what additional costs you are paying on your home loan. You have a right to know, and the bank has an obligation to disclose these costs.