Switching your home loan – read the fine print

Home loans

During the property boom years of 2006 and 2007, it was a fairly common practice for South African homeowners to switch their home loans from one bank to another. Now with interest rates at a historic low, homeowners may be considering switching their home loans to negotiate a better deal to spare some much-needed cash.

There could be some benefit to switching one’s home loan to another financial institution, provided you keep an eye out for any hidden costs and compare apples to apples says Adrian Goslett, Regional Director and CEO of RE/MAX Southern Africa.

 “If another bank is willing to provide a lower interest rate, switching can be an enticing option. Even a small reduction of 0.5% in the interest rate could save you thousands over the term of the bond. However, you need to bear in mind that there will be costs and possibly penalties involved in switching. 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 advises that if you go ahead with switching your home loan, homeowners need to look at their current home loan agreement to see what clauses it contains regarding penalties and a notice period. More than likely, the financial institution will have included a penalty clause which could result in paying 90 days’ interest on the current home loan if cancelled before the stipulated notice period.

Apart from a possible penalty, there are also other costs involved which 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 before the minimum duration period has lapsed, the homeowner will have to pay the legal costs pertaining to the switch when cancelling the home loan,” Goslett warns.

Some banks may be willing to waive certain costs such as the valuation and administration fees. There is also a 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 more sense.

It also depends on the work volumes of the Deeds Office concerned. The transfer of the home loan may take between sixty days and three months. You would be required to provide the new bank with copies of your payslip, bank statements, ID and all other documentation requires to assess affordability before the switch can proceed.

Switching your home loan is not a quick and easy way to save money. Homeowners should take their time and do their research thoroughly before going ahead with this option. For first-time buyers, it is imperative to choose the right home loan. That’s why I would strongly encourage them to make an appointment with a bond origination service when it comes time to search for a home loan. This way, they can compare all their options and make the right choice from the start” Goslett concludes.