Making use of a payroll deduction to service a home loan has direct benefits to the consumer including a better risk profile with the bank, less chance of defaulting as well as additional advantages such as possible savings on banking fees and a better credit rating with the bureaus.
“There are many benefits from arranging a payroll deduction to service a home loan,” says Lee Mhlongo, CEO of FNB Housing Finance. “Approximately 30% of our affordable housing book comes from payroll deductions and we would encourage customers to go down this route, if their company offers this as a solution.”
A payroll deduction means that a customer’s home loan will come from their salary and the instalment or premium due will be paid directly by the employer to the service provider on behalf of their employee. The balance of the salary is then paid over to the employee.
“The major benefit of entering into a payroll deduction agreement for a home loan repayment is that the customer is generally viewed as less of a risk to the bank, and will therefore reap the benefits of lower interest rates,” says Mhlongo.
With a payroll deduction there is a reduced risk of customers not repaying his or her home loan on time.
“There is always the chance, with a debit order, that the customer has a shortfall when there are insufficient funds in his bank account which may result in the home loan falling to arrears which may have credit bureau ramifications,” says Mhlongo.
The fact that the customer is making use of a payroll deduction will be taken into account when a bank reviews the home loan application,” continues Mhlongo. “This means that the customer stands a greater chance of being approved for a loan. And in some cases, having a payroll deduction could mean the difference between being granted a loan, or not. Customers can also receive a better interest rate which directly translates into money in their back pocket at the end of the day.”
There are other benefits to the customer including savings on fees, as there is no need for a debit order, which is a deduction from the customer’s nominated bank account to make a payment. Debit orders can sometimes attract a banking fee.
“Another plus for home loan customers is a better credit profile listed on the credit bureaus, because your payment behaviour will show that you are able to service debt responsibly, and this will help with lower interest rates on other credit products,” says Mhlongo.
One potential pitfall, when it comes to payroll deductions, is if there is a rate change.
“It is important to note, if you have a payroll deduction in place, if there is a rate increase, you will need to have the salary deduction increased with your payroll, as this is not currently automatic,” warns Mhlongo.
Customers also need to take the fact that they have made use of the payroll deduction when they move jobs.
“Not all companies allow, or have the ability to service payroll deductions, which means that if a customer moves jobs he or she will have to speak to their home loan provider,” says Mhlongo. “However, this does not necessarily mean that they will lose their negotiated better interest rate, the fact that there was a payroll deduction previously in place, although not guaranteed, may work in their favour.”