During the property boom years of 2006 and 2007, switching home loans from one bank to another was a fairly common practice among home owners in South Africa. However, this has diminished over the years. Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, says that as banks tightened their lending criteria, it was not as easy for home owners to switch and the trend lost some traction in the years that followed 2007.
While not as common as it once was, Goslett says that there could be some benefit to switching one’s home loan to another financial institution, provided the homeowner keeps an eye out for any hidden costs and compares apples to apples. “If another bank is willing to provide a lower interest rate, switching can be an enticing option for homeowners. Even a small reduction of 0.5% in the interest rate could save the homeowner thousands over the term of the bond. However, what homeowners need to bear in mind is that there will be costs and possibly penalties involved in switching,” advises Goslett. “Before looking at other banks, it would be advisable to speak to a home loan consultant at your current bank and see whether they would be willing to look at renegotiating the interest rate. If the response is positive, you may have saved on interest without having to pay any additional costs.”
Goslett says that if the home owner goes ahead with switching, they will need to look at their current home loan agreement and see what clauses have been written into the contract regarding penalties and a notice period. “More than likely the financial institution will have included a penalty clause, which could result in the homeowner paying 90 days’ interest on their current home loan if cancelled before the stipulated notice period has passed.”
Apart from the possible penalty, Goslett says that there are also other costs involved in switching. These costs include attorney fees, a registration cost to register the new home loan, valuation fees and an initial administrative fee. Often the new bank will pay the legal costs of the switch, but this is subject to a minimum duration of the new bond. Essentially, what this means is that if the homeowner decides to sell their property before the minimum duration period has lapsed, they will have to pay the legal costs pertaining to the switch when they cancel the home loan.
“These aspects of the switch is why it is so important to fully understand the offering that the new bank is putting on the table and goes back to comparing like with like. If the new deal saves the homeowner interest, but offers no other benefit and ends up costing more in fees, then there is no reason to switch. The only way that the homeowner will know if they are getting a better deal is if they compare all aspects of the deal with what they currently have,” warns Goslett.
Some banks might be willing to waive certain of the costs, such as the valuation and administration fees. There is also the chance that they would be willing to pay a portion of the registration and cancellation costs involved. If this is the case, then switching would make far more sense.
Goslett says that depending on the work volumes of the Deeds Office concerned, the transfer of the home loan will take between 60 days and three months. The home owners will be required to provide the new bank with copies of their pay slip, bank statements, ID and all other documentation required to assess affordability.