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Switching Home Loans

Switching your Home Loan

According to the latest Absa Mortgage Advances Report, CPIX is expected to reach a new high of 9.5% during March and that this, together with a weakening Rand, will probably see a further repo rate hike cracking the nod during the next Monetary Policy Committee meeting in April.

The ever-present threat of increased interest rates and the reality of escalating inflation have motivated many South Africa property owners to start flexing their mortgage muscles. Mortgage brokers report that between 40% and 60% of the applications submitted to them, are from existing mortgage holders who wish to secure better interest rates by switching their mortgage providers.

The tendency to shop for better deals should come as no surprise considering the bleak short term economic outlook. And, with our banks and non-bank lenders openly courting their competitors’ home loan business, switching is believed to be a potentially viable alternative.

But, is switching all it is made out to be? We take a look at the Good, the Bad and the Ugly of home loan switching to find the answer.

The Good

Property is an enormous investment, and your home loan will probably be the largest, longest term debt you will ever incur. Because even a 0.5% saving on your current interest rate could make a material difference to the total amount you repay over time, it is Good to be aware of what your home loan provider’s competitors are up to and whether their respective offerings are more economical than the one you are currently availing yourself of.

It is also Good to realise that your bank or non-bank lender is no different from the other providers (garden service, cellular phone company, etc.) you may be using right now. If you can obtain the same or better service at a lower price, and if the total change makes financial sense when the numbers are finally added up, making the switch could well be the right thing to do.

The Bad

Switching without understanding the implications and the costs is a Bad idea.

For starters, your existing home loan provider will have drawn some lines in the sand. A three-month notice period and perhaps a clause stating that you cannot switch for the first six months after signing your mortgage agreement with them, immediately comes to mind. If you step over this line, you may find yourself in the Bad situation of having to pay some of your hard-earned money across as penalties.

Secondly, there are costs associated with switching. These could add up to around R 10,000 on a R 1 million mortgage, with legal fees gobbling up at least 80% of that amount. You will need to ensure that the savings you stand to gain by opting for a reduced interest rate offering offset the expenses you need to incur to make the switch. If there is no material benefit, switching could be a Bad idea.

The Ugly

Ever heard of Bait and Switch? Only a tiny percentage of lenders and brokers in this country are guilty of Bait and Switch, hence not many consumers are as aware of this Ugly as they should be. Bait and Switch is the practice of drawing customers through advertising low-ball offers without having any intention of honouring these. The idea is simply to get you through their doors and then to try and sell you on something else.

In home loan circles this normally manifests as advertisements promising impossibly low interest rates. More often than not, the baited prospects find themselves worse off. Not only will they “not qualify” for the low-low interest rate promised by the advertiser, but they may also be subject to hidden fees, contract chicanery and “locked” interest rate scams should they end up dealing with this particular Ugly.

To conclude

If you are in a position to capitalise on the Good, to overcome the Bad and have savvy enough to avoid the Ugly, switching is a worthy option. Securing the services of a reputable mortgage originator could prove to be valuable. They have the industry knowledge to help you avoid the switching pitfalls and the relationships to ensure that you end up with the best possible deal in the end.

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