The interest rate is the cost that you have to pay over and above the capital that you will have borrowed from the lender. It’s there for the life of the agreement, which typically is about 20 years. And for those homeowners who’ve already done a fair bit of time being on the property ladder and paying their bond, there’s no harm in approaching your home-loan lender to see whether they can further reduce your interest rate.
Well, to tell us more about this issue and more, I’m joined on the line by Meyer de Waal. He’s a conveyancing attorney from MDW Inc, based in the Western Cape. Thank you so much for joining us Meyer. For a first-time property buyer, you’re looking to engage the services of a home-loan provider, and you really want to ensure that you’ll get the best interest-rate deal possible. What will you have to do in order to look your most financially fit and secure the best interest rate?
MEYER DE WAAL: Good evening. What you first have to understand is what the bank will look at when they assess your home loan. It is all about risk-mitigation for the bank, and no wonder they are looking at your credit profile. If your credit profile is not so strong, the bank may add 1% or 2% on top of the prime lending interest rate – 7% at the moment – to add in a little bit of insurance that, if you default they have some cover.
The second aspect they look at will be your affordability. And that is your ability to repay the home loan every month, considering all your debt and your living expenses.
Then the third one is your loan to value. Are you putting down a deposit, or are you applying for a home loan?
So those are the three elements that a bank will consider in general and in principle to consider a home loan. Obviously, if you can contribute a deposit [that is better]. Now, many home buyers don’t have a deposit, but first-time buyers have access to a government subsidy called FLISP, which stands for Finance Linked Individual Subsidy Programme.
NOMPU SIZIBA: Tell us about that. What does that do? How much help does the government give people who qualify for it?
MEYER DE WAAL: If you’re a first-time buyer and you earn between R3 501 and R22 000, that is gross household income, you may qualify for the subsidy. If you’re a first-time buyer – if your home loan is approved, and it must be from one of the traditional banks, if you have a financial dependant, like a child or a spouse, and if you are a South African citizen – then you can apply to the government once your home loan is approved, and the subsidy will kick in.
The subsidy starts at R3 500, and then your subsidy is roughly R120 000. As an example, when you earn R15 000 your subsidy is R63 000, and when you earn R22 000 your subsidy is roughly R26 000. So it’s a fantastic opportunity for first-time buyers to make use of. That subsidy can be put down as a deposit and with that deposit, then renegotiate a lower interest rate for your home loan.
NOMPU SIZIBA: That’s excellent. I wonder how many South Africans actually know about this. Due to the Covid-19 pandemic, our Reserve Bank has been very generous in its support to the economy, cutting the repo rate by 300 basis points. Tell us why reducing the interest rate on your home loan is so important, and can be so material to your cost profile over the lifetime of the bond.
MEYER DE WAAL: The average home owner sits and waits for the Reserve Bank, and always hopes that the interest rates will go down rather than go up. Now we’ve seen how generous the Reserve Bank has been by dropping all these basis points. But, if you look at normal vehicle insurance, as the value of your vehicle reduces, your payments that you pay to your insurance also drop if you have a wide-awake insurance broker. So every year your insurance comes down.
However, we find that if the bank approves your home loan at prime plus one or prime plus two [percent], they will never approach you as a consumer and say to you, “Dear Mr Home Owner, for the last five years you have paid your bond without fail. Your salary has increased, your affordability has improved, your credit score is in good standing, and the value of your property has increased – can’t I reduce your home loan’s interest rate for you?” No, you have to sit and wait for the Reserve Bank, and the bank will actually (I call it) trap you for 20 years in the high interest rate. I have done calculations that an interest rate of prime plus two will cost the home owner a whopping 32% more for the property, paying off over 32 years.
So my recommendation to every homeowner is to do your homework first, make sure that your credit score is good, your affordability is good, and go back to your bank and renegotiate your interest rate.
NOMPU SIZIBA: What happens if you do approach your bank, but they’re not willing?
MEYER DE WAAL: Remember that securing the home loan when you buy the property is most likely the most nerve-wracking time of buying a hose. Then the bank can decline your home-loan application. Once you’ve got your home loan, the bank will not withdraw your home loan if you continue to pay your home loan on a regular basis. So, once you’ve got it, you can actually be a little bit cheeky and go to them and say: “It’s now three years later, it’s two years later, and I would like to approach you, as my bank – we’ve got a good relationship – please consider reducing my interest rate now.”
If the bank doesn’t want to do that, go to another bank, because this bank is clearly not loyal to you as a customer. They want to trap you in there for 20 years, paying a very high interest rate. Then make 100% sure of your financial affairs, your credit score, if you are good standing, otherwise you’re going to lose face.
So my recommendation is, if the bank doesn’t want to cooperate with you, go to another bank that will show you some loyalty. And you’ll find that you have to pay some attorney conveyancing fees, cancellation of your bond, and maybe even re-registration of your bond. On R1 million, if you can say R320 000, paying legal fees will be a small drop to pay and to sacrifice.
NOMPU SIZIBA: I suppose you have a point there. And, just from your experience, do you know of clients and people who have approached their banks, and indeed they’ve agreed to giving them a lower interest rate, because their profile is so much better – as you’ve described?
MEYER DE WAAL: I advise all my clients to go back to the bank one year later. And I’ve had success with my clients because, quite often when the home loan is approved and they come and sign their bond documents, I tell them don’t rush into the situation at this moment, or don’t wait for the cagiest moment, because you’ve just received a home loan. But let’s go back to the bank in one year. Sometimes you find that your own bank will definitely cooperate and work with you. And if thy don’t work, we go to a different bank. People call me to switch.
People are switching from one bank to another bank on a regular basis. Sometimes the one bank adds a credit card for you. Sometimes they add a savings account for you. So the banks are hungry for other business. And, interesting enough is that the mortgage originators have an agreement with the banks not to participate in switches of home loans. So you have to go to your own bank, directly to the home loan department, or go directly to the home loan department of another bank and say, “My bank is treating me badly. Would you like to have me as a customer?”
NOMPU SIZIBA: But what happens if you decide to change, and you can get a really good interest rate with the other bank, but now you have to start a whole new contract with them? So, I’ve paid for 10 years. Now I must get another 20-year loan agreement.
MEYER DE WAAL: A very good question. That is where your own discipline must come in. You must continue to pay that bank that home loan back over the same period of time that you applied for, because, if you do stretch your home loan for another five or another 10 years, that becomes one of your most expensive credit agreements if you start stretching your home loan. Consider at the same time, if you pay back the home loan over 10 years, 20 years, you can also stretch it for a lower repayment every month, over 30 years. That extra 10 years adds thousands and thousands of rands to your home loan. So always have the discipline to pay back the loan in the same amount of time. You’re going to find one of the most amazing things. If you do save yourself R1 000/ R2 000 on your lower interest rate, pay that extra money back into your home loan, and then you’ll find that your original 20 years of home loan comes down to maybe 16 years, maybe to 15 years; you are used to that extra R1 000 or R2 000 every month. So continue to pay it, but pay it back into home loan as an extra payment, and then you’ll see how quickly you pay back your home loan. And then you get the double benefit of a lower interest rate plus paying back your home loan much faster.
NOMPU SIZIBA: Mr De Waal, nice talking to you. Thank you so much. That was Meyer de Waal, a conveyancing attorney from MDW Inc, and he’s based in the Western Cape.
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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE)