Does your race affect your interest rate?

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Does your race affect your interest rate?
Does your race affect your interest rate?

This past week social media erupted when claims of discrimination were made against FNB on SABC’s Special Assignment.

Lee Mhlongo, CEO of FNB Home Finance, vehemently denied any discrimination towards its black clients. In a media statement, FNB said: “The matter dates to 2002 when Saambou was placed under curatorship and FNB subsequently took over the administration of the home loan book.

“After a review of Saambou home loans, FNB announced its decision to act on behalf of former Saambou customers who may have been charged incorrect interest. FNB undertook to recalculate the approximately 80 000 Saambou home loan accounts that could have been affected by the interest calculation method used by Saambou.

“In May 2006 FNB completed the recalculation and about 50 000 customers qualified for a refund as a result of the incorrect interest charged by Saambou. The interest of the remaining 30 000 home loan customers was calculated correctly and required no adjustment to their accounts.

“In June 2006 FNB offered refunds totalling R154 million to former Saambou customers whose home loans had been affected.

“FNB can confirm that, throughout this process, the bank acted to protect the interests of the affected former Saambou customers.”

Mhlongo said the matter was now before the Equity Court and hearings would begin in April.

Besides the alleged discrimination, it seems that the majority of people were still not aware of how the interest rate is calculated and this could result in a perception that certain groups of people were treated unfairly.

In my personal experience, I found the mortgage market was quite competitive. When we bought our home, I personally compared the interest rate the different banks were willing to give us. All four banks came in very close to one another. We received a rate below prime because of our strong financial position – namely a good credit score, affordability and the ability to pay a deposit.

Your interest rate is based on a combination of two factors per individual:

1. Your credit score

Your credit score essentially informs the bank of your credit behaviour. It shows if you have consistently paid your financial obligations on time or not.

Depending on your credit score, a bank can choose to give you a high-interest or a lower-interest rate. If your credit score is low, it means you are at a higher risk of default and therefore the bank will charge a higher interest rate to cover its exposure.

The following score bands are defined:

  • EXCELLENT: 767 – 999
  • GOOD: 681 – 766
  • FAVOURABLE: 614 – 680
  • AVERAGE: 583 – 613
  • BELOW AVERAGE: 527 – 582
  • UNFAVOURABLE: 487 – 526
  • POOR: 0 – 486

(source: TransUnion)

Every citizen is allowed one free credit score check a year. Aim to get your credit information from at least three of the main credit bureaus including TransUnion, Experian and Compuscan.

2. Whether you have a deposit or not

Having a deposit puts you in a stronger position as a buyer because the higher the deposit, the smaller your home loan application will be; thereby reducing your monthly instalments.

Borrowing 100% vs 90% of the bond amount means that the bank has 100% exposure, therefore it carries all the risk. And this translates into a higher interest rate. If two people have the same credit score and are buying a property for the same value, the one who can put down a 10% deposit will most likely qualify for a better rate.

For this reason, it is important to try to improve your credit score by having a deposit before you buy your house.

Also, if you are an existing client with a bond through any of the banks, you are allowed to go back to your bank and ask for a review of your interest rate if you feel that your credit score and financial life has improved over the period of the loan.

Makhu is a personal finance coach

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