You don’t need to be tied to your home loan interest rate

Raising a home loan is often the one of the most stressful times in one’s life.

Renegotiating a lower interest rate a few years later (anything between 1-10 years later) can save you thousands of Rands. You have nothing to lose then, as your home loan is already approved.

“If your own bank does not want to lower your interest rate, switch to another bank that is willing to do so,” says Meyer de Waal a Cape Town conveyancing attorney.

“Let us unpack it how it can be done,” says De Waal and start with the home buying process.

You find the house of your dreams and submit an offer to purchase to the seller.

Your fate is in the hands of the financial institution to approve your home loan.

You are aware that a bank will dig deep to look into your past payment behaviour, your exposure to debt, your income ratio compared to your living and debt repayment expenses and the strict “rules and regulations” of the National Credit Act.

When the financial institution finally approves your home loan some weeks later, you are so glad to “be approved” that the interest rate that the bank quote you are of little consequence as you are desperate not to lose the house you signed for. You accept the higher interest rate quotation, “just to get the deal done”.

Charles and his wife, first time home buyers, recently had three financial institutions declining their home loan application. Little explanation was given, apart that their credit score did not meet the requirements of their lending practices. Two other financial institutions approved the home loan, one with a 100% approval and one at a 93% approval to settle the full purchase price.

The lending criteria from one bank to the other differ from time to time as they need to expand their market share in the mortgage industry. Financial institutions build in extra “insurance” for them in charging higher interest rates. The 100% home loan approval had an interest rate of prime (currently 10%) plus 1% extra. The 93% home loan had an interest rate of 10%, explains De Waal.

Charles and his wife accepted the 100% home loan as they did not have 7% cash deposit to put down, even though the interest rate was slightly higher.

The higher interest rate will, however, cost them thousands of Rands in repaying the home loan over 20 years.

Few consider renegotiating a lower interest rate two years later (and many do not realise this is possible).

Many home buyers will want to avoid the trauma and stress of going through a home loan application process again two or three years later and do not want to pay attorney registration fees again. Existing home buyers are not aware that they can renegotiate their current home loan interest rate with their same financial institution that holds their current home loan.

Mortgage originators do not get any commission from a bank for renegotiating a lower home loan interest rate or switching home loans between financial institutions. Financial institutions are however aggressive to expand their current market share with good quality customers.

“Do not get stuck with the same interest rate for the rest of your home loan repayment period. If can cost you thousands of Rands over the repayment period of a home loan term that can stretch up to 20 or 30 years. If your current bank does not want to renegotiate and lower your home loan rate, apply to another bank and negotiate a lower interest rate,” says De Waal.

The motivation behind this is that your affordability, credit score and “loan to value” ( this means the value of your property compared to the original loan amount) may have improved drastically over the years. As your overall profile and property value improves, so your risk to the bank may decrease. You may be able to negotiate a lower interest rate.

A simple calculation, using the situation of Charles and his wife can prove the point:

• Paying back a R600 000 home loan over 20 years with an interest rate of 11% will cost R6 193 per month. The total repayment over 20 years (the normal home loan term) will be R1 486
• A similar home loan amount with an interest rate of 10% will cost the home buyer R5 790 per month. The total repayment will be R1 389 631 over the 20-year period.

One extra percent interest will therefore cost R403 more per month and R96 720 over the 20-year repayment term.

If Charles obtains a lower interest rate two years later, he can continue to pay the R403 saved per month into his bond, as he is now used to this payment. He can shave off two years and nine months of the home loan and save a further R123 335.

If one adds it all up, one percent lower interest rate can thus save Charles and his family a total of R220 055.

“The cost of cancelling the old home loan of +/- R3 500 plus the new registration costs of R16 500 will be a minor expense compared to the savings calculated above,” says De Waal.

Herewith the calculation:

Calculate your own increased bond repayment savings.

Negotiate a lower interest rate from day one.

If the home loan application is structured correctly, a lower interest rate can be negotiated from day one.

For the home loan application of Charles, neither the estate agent, mortgage originator or the four major financial institutions considered first calculating the FLISP Government subsidy that Charles could qualify for. A FLISP subsidy can reduce the home loan application.

Charles and his wife can qualify for a R70 000 FLISP subsidy. This means that the FLISP subsidy can be deducted from the 100% home loan applied for and a lower home loan amount applied for. A lower home loan amount and a deposit (using the FLISP subsidy as a deposit) would enable the financial institution to approve a home loan “easier” and also grant a lower interest rate.

For more information on FLISP subsidies, go to the FLISP information website. To calculate your own FLISP subsidy calculation, click here.

ARE YOU READY AND “BUDGET FIT ENOUGH” TO RENEGOTIATION YOUR INTEREST RATE?

Before you go out and re-negotiate your home loan, first make sure that your “financial ducks” are in a row. Do not apply if your budget and credit score are not “fit” enough”, says De Waal.

Your current good credit score, your affordability and the value of your property will be the key elements for you to renegotiate a better home loan interest rate.

If your credit score deteriorated and/or you took on a lot more credit agreements since you home loan was approved, your ability to renegotiate a better interest rate may not be a ready to for submission.

It is best advised first to improve your credit score and settle some debt before you re-apply.

To compare the recent property prices in your area, go to the Property 24 website.

Watch a video how to check your credit score and do your affordability check all online.

You can start to do your own online credit and affordability score checks to compare if your ability improved over the past few years and the potential new home loan you may qualify for. Click here for an online credit check and affordability calculation all in one.

For further information contact Meyer de Waal on 021 461 0065 or email meyer@mdwinc.co.za.