CAR PREMUIMS ARE REDUCED
If you insurance a car, the value of the car reduces every year. An insurance company is usually willing to adjust and reduce the car insurance premiums to accommodate the lower value if the car as the exposure to risk of the insurance company decreases.
HOME LOAN INTEREST RATES DO NOT REDUCE
The value of a property increases over time. The risk of the home owner client reduces over time as the income of the home owner usually increases. A portion of the home loan debt is repaid. The risks of a bank thus decreases over time.
However, no financial institution will contact a home owner client with a home loan to pay back to advise the client that they are willing to reduce the interest rate of the home loan due to the increase in value of the property insured or the reduced risk.
Says Meyer de Waal, “the home owner has to rely on the Reserve Bank to reduce the interest rates. Even then, the home buyer is still stuck with the original interest rate of one or two percentages above the prime lending rate.”
“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’s unpack it how it can be done, says De Waal, starting with the home buying process:
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 the bank quotes you is 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”.
De Waal discusses an example to illustrate this:
Charles and his wife, first-time home buyers, recently had three financial institutions declining their home loan application. Little explanation was given, apart from 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.
ONE OR TWO PERCENT OVER THE PRIME LENDING RATE
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 themselves by charging higher interest rates. The 100% home loan approval had an interest rate of 8%. The 90% home loan had an interest rate of 7%, explains De Waal.
Charles and his wife accepted the 100% home loan as they did not have the 10% 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.
De Waal says 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 homeowners are not aware that they can renegotiate their current home loan interest rate with the 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, aggressively expanding 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. It 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.
The motivation behind this is that your affordability, credit score and ‘loan to value’ (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:
One extra percent interest will therefore cost R367.00 more per month, and R88 043.00 more over the 20-year repayment term.
If Charles obtains a lower interest rate two years later, he can continue to pay the R367.00 saved per month into his bond, as he is now used to this payment. He can shave off two years and ten months of the home loan and save a further R85 059.00.
If one adds it all up, one percent lower interest rate can thus save Charles and his family a total of R173 102.00.
But what if your bank doesn’t want to renegotiate and you apply with another bank? “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.
See what you’ll save if you get a lower interest rate
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 more easily, and also grant a lower interest rate.
For more information on FLISP subsidies, go to the FLISP information website. To calculate the FLISP subsidy you could qualify for, click here.
Are you ready and ‘budget fit’ enough to renegotiate your interest rate?
Before you try to renegotiate 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 that allow you to renegotiate a better home loan interest rate.
If your credit score deteriorated or you took on a lot more credit agreements since you home loan was approved, it might not be the best time to try and renegotiate a better interest rate.
The best advice would be to first improve your credit score and settle some debt before you re-apply.
Watch a video on how to check your credit score and do your affordability check online:
You can start by doing 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.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)