Author: Meyer de Waal
27 September 2020
Stuck with a bond interest rate above prime? Here’s how to renegotiate with your bank
Raising a home loan is often the one of the most stressful times in one’s life – but don’t forget, renegotiating a lower interest rate a few years later can save you thousands of rands. You have nothing to lose, so it’s worth a try.
If you insure a car, the value of the car reduces every year. An insurance company is usually willing to adjust and reduce the car insurance premiums to accommodate the lower value if the car as the exposure to risk of the insurance company decreases.
The value of a property increases over time. The risk of the home owner client reduces over time as the income of the home owner usually increases. As a portion of the home loan debt is repaid, so too the risks of a bank decreases over time.
However, no financial institution will contact a home owner client with a home loan to pay back to advise the client that they are willing to reduce the interest rate of the home loan due to the increase in value of the property insured or the reduced risk.
Says Meyer de Waal a Cape Town conveyancing attorney, “the home owner has to rely on the Reserve Bank to reduce the interest rates. Even then, the home buyer is still stuck with the original interest rate of one or two percentages above the prime lending rate.”
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For a new home loan, most buyers are so glad to have their home loan approved that the interest rate the bank quotes is of little consequence, and few consider renegotiating a lower interest rate two years later, or even know it’s possible.
“If your own bank does not want to lower your interest rate, switch to another bank that is willing to do so,” says de Waal,
Let’s unpack it how it can be done, says De Waal, starting with the home buying process:
- You find the house of your dreams and submit and offer to purchase to the seller.
- Your fate is in the hands of the financial institution to approve your home loan.
You are aware that a bank will dig deep to look into your past payment behaviour, your exposure to debt, your income ratio compared to your living and debt repayment expenses and the strict ‘rules and regulations’ of the National Credit Act.
When the financial institution finally approves your home loan some weeks later, you are so glad to ‘be approved’ that the interest rate the bank quotes you is of little consequence as you are desperate not to lose the house you signed for. You accept the higher interest rate quotation, “just to get the deal done”.
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De Waal discusses an example to illustrate this:
Charles and his wife, first-time home buyers, recently had three financial institutions declining their home loan application. Little explanation was given, apart from that their credit score did not meet the requirements of their lending practices. Two other financial institutions approved the home loan, one with a 100% approval and one at a 93% approval to settle the full purchase price.
One or two percent over the prime lending rate
The lending criteria from one bank to the other differ from time to time as they need to expand their market share in the mortgage industry. Financial institutions build in extra ‘insurance’ for themselves by charging higher interest rates. The 100% home loan approval had an interest rate of 8%. The 90% home loan had an interest rate of 7%, explains De Waal.
Charles and his wife accepted the 100% home loan as they did not have the 10% cash deposit to put down, even though the interest rate was slightly higher.
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The higher interest rate will, however, cost them thousands of rands in repaying the home loan over 20 years.
De Waal says few consider renegotiating a lower interest rate two years later, and many do not realise this is possible.
Many home buyers will want to avoid the trauma and stress of going through a home loan application process again two or three years later, and do not want to pay attorney registration fees again. Existing homeowners are not aware that they can renegotiate their current home loan interest rate with the same financial institution that holds their current home loan.
Mortgage originators do not get any commission from a bank for renegotiating a lower home loan interest rate or switching home loans between financial institutions. Financial institutions are, however, aggressively expanding their current market share with good quality customers.
Do not get stuck with the same interest rate for the rest of your home loan repayment period. It can cost you thousands of rands over the repayment period of a home loan term that can stretch up to 20 or 30 years. If your current bank does not want to renegotiate and lower your home loan rate, apply to another bank and negotiate a lower interest rate.
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The motivation behind this is that your affordability, credit score and ‘loan to value’ (the value of your property compared to the original loan amount) may have improved drastically over the years. As your overall profile and property value improves, so your risk to the bank may decrease. You may be able to negotiate a lower interest rate.
If you continue to pay your monthly interest rate savings into your home loan, you will pay it off faster and save even more.
A simple calculation, using the situation of Charles and his wife can prove the point:
- Paying back a R600 000 home loan over 20 years with an interest rate of 8% will cost R5 018.00 per month. The total repayment over 20 years (the normal home loan term) will be R1 204 473.
- A similar home loan amount with an interest rate of 7% will cost the home buyer R4 651.00 per month. The total repayment will be R1 116 430 over the 20-year period.
One extra percent interest will therefore cost R367 more per month, and R88 043 more over the 20-year repayment term.
If Charles obtains a lower interest rate two years later, he can continue to pay the R367.00 saved per month into his bond, as he is now used to this payment. He can shave off two years and ten months of the home loan and save a further R85 059.
If one adds it all up, one percent lower interest rate can thus save Charles and his family a total of R173 102.
But what if your bank doesn’t want to renegotiate and you apply with another bank? “The cost of cancelling the old home loan of +/- R3 500 plus the new registration costs of R16 500 will be a minor expense compared to the savings calculated above,” says De Waal.
Negotiate a lower interest rate from day one
If the home loan application is structured correctly, a lower interest rate can be negotiated from day one.
For the home loan application of Charles, neither the estate agent, mortgage originator or the four major financial institutions considered first calculating the FLISP Government subsidy that Charles could qualify for. A FLISP subsidy can reduce the home loan application.
Charles and his wife can qualify for a R70 000 FLISP subsidy. This means that the FLISP subsidy can be deducted from the 100% home loan applied for and a lower home loan amount applied for. A lower home loan amount and a deposit (using the FLISP subsidy as a deposit) would enable the financial institution to approve a home loan more easily, and also grant a lower interest rate.
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Are you ready and ‘budget fit’ enough to renegotiate your interest rate?
Before you try to renegotiate your home loan, first make sure that your ‘financial ducks’ are in a row. Do not apply if your budget and credit score are not ‘fit enough’, says De Waal.
Your current good credit score, your affordability and the value of your property will be the key elements that allow you to renegotiate a better home loan interest rate.
If your credit score deteriorated or you took on a lot more credit agreements since you home loan was approved, it might not be the best time to try and renegotiate a better interest rate.
The best advice would be to first improve your credit score and settle some debt before you re-apply.
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