The account summary of my home loan from one of the major banks reflects the balance owing and the interest accrued over a month. However, the entire amount of interest paid over the 20-year life of the bond will far exceed the actual amount borrowed – the capital amount.
When you are applying for a bond, securing an interest rate of even 0.5% less than prime will save you substantially (see “How to get a lower interest rate on a bond”).
But if you already have a bond, it could also be possible to achieve a lower interest rate – by switching your loan to another bank. We asked two of the major banks (at random) for insight into the process involved.
“Itis possible that another bank could offer you a lower interest rate than your current rate,” says Nondumiso Ncapai, Managing Executive: Absa Home Loans.
The bank you approach will consider your application in the same way that it does if you were initiating a new mortgage bond. “It very much depends on your risk profile at the time and your affordability,” adds Ncapai. However, this time round, there’s another factor: the remaining term of your current loan”. And it could work in your favour.
“Your loan-to-value (LTV) rate is likely to be lower once you are some years into the term of your bond. This is due to the appreciation of your property’s value since purchase and the reduction of your outstanding bond balance over time,” explains Vanashree Naidoo, Strategic Platform Lead at FNB Home and Structured Lending. “As a result, you may have greater leverage to negotiate a more favourable interest rate, provided that your credit score remains healthy, your bond is in good standing, and you have a consistent repayment history.”
Shop around, advises Naidoo. However, don’t just compare interest rates. “Each financial provider has different switch offers, so carefully weigh up the benefits of each, to make an informed decision.”
It’s important to consider the following costs when switching a mortgage bond from one financial institution to another, Naidoo notes:
- Early termination fees (Check the requirements of your current bank: for instance, they might require you to provide 90 days’ notice of your intent to cancel the bond with them.)
- Bond cancellation costs at your current bank
- Attorney’s bond registration costs
- Initiation fees.
“Generally,” says Ncapai, “consumers negotiate for their switching costs to be covered by the bank they are switching to”.
Ncapai offers a cautionary note about your motivation for switching: “Switch for the right reasons. If you are in financial distress, then switching your home loan is not the solution. Rather, it is best to contact your current bank about restructuring your home loan.”
So what is the switching process?
“Notify your current bank of your intention to cancel the existing bond and switch to another bank. Then apply for a home loan with the new bank – and indicate that it is a switch application,” explains Ncapai. “The application will be processed, the property will be valued at that point and the bank will send you a switch offer. If you accept the offer, the loan is registered with the new bank.”
