WORDS: MARANA BRAND – IMAGES: SHUTTERSTOCK
There are many reasons why consumers consider switching their home loan to another lender, such as a lower interest rate, reduced monthly payments, consolidating finances, freeing up some cash, and long-term cost savings, among others. Whatever your motivation, it’s important to do your homework and keep an eye out for hidden costs.
If another bank is willing to provide a lower interest rate, switching can be an enticing option, says Adrian Goslett, regional director and CEO, RE/MAX of Southern Africa. “Even a small reduction of 0.5% in the interest rate could save you thousands over the term of the bond.”
Under the current economic conditions where interest rates are already very low, a more compelling reason for switching could be to access the equity that has built up in a homeowner’s property over time, says Kevin Penwarden, CEO, SA Home Loans.
“Equity in the home loan (the difference in value between what you owe on your home and the value of the home) may have built up from decreasing the outstanding amount on your bond over the years, or the value of the home may have increased since the home was first purchased. This value that has built up is available to homeowners by switching their home loan to a new home loan provider,” Penwarden says.
Switching your home loan and accessing the equity in one’s property, is probably the cheapest form of credit available and has several potential benefits, he says. These include:
- Switching gives access to any additional value in the property
- Additional equity can be used to reduce expensive, short-term debt
- It helps you maintain a healthy credit profile
- It can result in an increased surplus in your monthly budget
- It makes your property investment work harder
- It gives you the option to free up cash to use for projects such as home improvements
When switching your home loan, you’re technically applying for a new home loan, which includes assessing affordability. It therefore means fees that you would normally incur for a new home loan, such as the initiation and bond registration fees, are applicable. Penalties may also apply.
So before you look at other lenders, it would be advisable to speak to a home loan consultant at your current bank and see whether they would be willing to renegotiate. “If the response is positive, you may have saved on interest without having to pay any additional costs,” says Goslett.
If you go ahead with switching, he advises homeowners to look at their current home loan agreement and see what clauses it contains regarding penalties and a notice period. “More than likely, the financial institution will have included a penalty clause, which could result in paying 90 days’ interest on the current home loan if it’s cancelled before the stipulated notice period has passed.”
Apart from the possible penalty, other costs involved in switching include legal fees, a registration cost to register the “new” home loan, valuation fees and an initial administrative fee
To take the angst out of switching, lenders often give customers discounts or take on some of these fees like the legal costs of the switch (subject to a minimum duration of the new bond) or the valuation and administration fees, making the process easier. There’s also the chance that they would be willing to pay a portion of the registration and cancellation costs involved. “If this is the case, switching would make far more sense,” Goslett says.
Weigh it up
Although some lenders will simplify the switching process considerably, the transfer of the home loan may still take anything from 60 days to three months, depending on the work volumes of the Deeds Office, Goslett warns
“Switching your home loan is not a quick and easy way to save money. Homeowners should take their time and do their research thoroughly before going ahead with this option,” he concludes.