The entry of First National Bank into the discount home loan market this
week makes for very tempting low interest rates.
FNB`s new SmartBond and SA Home Loans are offering interest rates at more
than two percent below the prevailing base home loan rate of 15,5 percent.
The big question is whether to switch your loan to another institution or
not.
There are several factors that you have to consider in deciding to move your
loan to another institution offering a better interest rate. These include
the amount of your loan, the difference between the interest rate you can
get and the one you are now paying, and the time you expect your loan to run
for.
To find out if switching is worth it, you should do some basic calculations
for yourself. You can use the nifty calculation table provided below. Obtain
the information on loan cancellation costs, bank fees and the registration
costs from your own bank, and from the institution to which you are
considering switching your loan. Remember that this exercise is only a
guide.
You should consider the following before moving your loan:
* Loan size
The discount interest rates apply to loans of R100 000 or more. The minimum
loan for FNB`s new SmartBond is R200 000 and SA Home Loans is R100 000. If
you only have R50 000 left to repay on your current loan, clearly you would
not qualify for the discount rates and will have to stay put with your loan.
* Costs
Switching involves the cancellation of your existing loan and it means a new
bond has to be registered. There are costs attached to each of these
processes.
For example, on a R200 000 loan you can expect to pay about R3 300 to
register a new loan. This excludes any cancellation costs that you may have
to pay.
These costs are fairly substantial, although both FNB and SA Home Loans
discount the costs of registering a new loan by 50 percent. To get the full
benefit of a lower interest rate when switching your loan, you should try to
pay these costs in cash, rather than adding them onto your bond. By adding
them, you are, in effect, paying the costs over the term of the bond and,
even worse, you are paying interest on that money.
* Cancellation penalties
You may be charged a cancellation fee, if you are currently contracted into
a variable rate loan, which is, on average, R150. This is where your
interest rate goes up and down in line with what is happening in the
economy.
The Usury Act allows banks to charge you a penalty of three months interest,
unless you give three months notice. At present, only NBS and Saambou charge
this cancellation penalty.
If you are currently locked into a fixed loan contract, or a reducing loan
contract, you may have to wait until the end of your contract`s term, before
looking to switch.
The penalties charged are calculated differently, depending on the bank.
Standard Bank charges you R1,80 for every R1000 outstanding, multiplied by
the number of months the contract has left to run.
FNB charges you the difference between the fixed rate and prime rate at the
time, set against the balance of the loan, multiplied by the remaining
months. Absa charges one percent of the outstanding balance and Saambou
charges 0,04 percent of your original loan.
With a fixed rate, you lock into a particular rate for a period, usually 12,
18 or 24 months.
With a reducing rate contract, your interest rate reduces in steps over a
certain period, which can be anything between 12 months and five years.
Cancellation penalties obviously add to your overall costs of switching and
the higher they are, the less you will score by taking out a new loan at a
lower interest rate.
* Loan term
While paying a lower interest rate means paying less interest and saving
money, bear in mind that if you have only a few years to go until you have
paid off your existing loan, it does not make sense to move your loan to
another bank, only to refinance over another 20 years. Even at a slightly
lower interest rate, you will be paying far more.
* Your current interest rate
The prevailing base home loan rate is 15,5 percent. But many borrowers are
paying less than this. If your bank regards you as a good customer, you can
be paying up to two percent lower on your existing loan. The key to getting
a good deal is to negotiate. Just because you accepted a particular rate
when you took out your loan initially, does not mean you cannot go back to
your bank and ask for a better deal. Your bank already knows you and the
state of your finances, especially if you have your other accounts at the
same bank and if you are a good credit risk, you can very likely get a
better rate.
* Your "new" interest rate
The rate which another institution offers you also plays a role in your
determining whether it is worth your while switching. If this rate is one
percent or more lower than what you are currently paying (and the best rate
your bank can offer you), it may be worth your while to switch.
SWITCHING CALCULATION
Savings
Current monthly loan repayments ...............R________
Less new monthly loan repayments...............R________
Monthly savings................................R________
Total savings..............................R________
(Monthly savings X number of months in which you plan to pay off your new loan eg 20 years will be 240 months.)
..............................R________
Switching Costs
Current loan cancellation fee and/or penalty...R________
(This should include fees charged by your bank as well as any legal costs)
Plus new loan bond registration costs..........R________
(Legal costs, deeds office registration free and stamp duty)
Plus Bank costs
Initiation fee.................................R________
Valuation/Inspection fee.......................R________
Total Switching Costs..........................R________
Subtract the switching costs from the savings.
If your switching costs are higher, it`s not worth your while moving your loan.
If your savings costs are higher, then it`s wotth your while to switch.
Note: This exercise does not take into account the compound interest savings. Compund interest is the interest you pay on interest. So for example, a R200 000 loan at 15 percent over 20 years will cost you R432 059 in interest only. The lower the interest rate you pay, the lower the interest on interest will be. For example the same R200 000 loan at 13.1 percent will cost you a total of R365 800 in interest alone.