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Interest rates move in cycles and when rates have been low for a long time, as we’ve experienced recently, they’ll start rising again.
In fact, the recent interest-rate hike probably indicates we’re once again in the upward phase. The rate increase will immediately start showing in your home-loan repayments.
If you’re considering moving your mortgage to another bond company that’s offering you a lower rate than you’re currently paying, it would be best to read this first.
While it’s tempting to opt for a lower interest rate, there are a number of things you should consider before making this decision.
1. CHECK THE LOAN PERIOD AND THE CONDITIONS OF YOUR BOND
There could be a penalty clause. Banks are entitled to a 90-day notice period from a client who intends cancelling their mortgage, regardless of when the loan was granted, according to the National Credit Act.
The penalty for early termination can be equal to 90 days’ interest on the outstanding balance of the bond (not the original bond amount).
You’ll have to pay the penalty if you cancel the loan without informing your bank, or if the stipulated notice period has expired. There could also be other unexpected costs.
If the bank absolved you from certain costs, such as bond registration, when you took out the loan, it might charge you for it if you’re cancelling the loan within a certain period. This should also be stipulated in your contract.
2. FIND OUT WHAT OTHER COSTS ARE INVOLVED FOR A NEW HOME LOAN
This includes things such as attorney’s fees, valuation fees, registration costs and inception administrative fees for the new loan.
The new bank often offers to pay the legal costs of cancellation of the old bond and registering the new one.
This isn’t the penalty for cancellation but the legal costs of the attorney processing the cancellation for the other bank.
Keep in mind that it could also be subject to certain conditions, for example legal costs that are refundable if the loan is cancelled within a certain period.
3. CHECK BY HOW MUCH YOUR INTEREST RATE CAN BE REDUCED AND WHAT DIFFERENCE THIS MAKES
The interest rate on your bond is important because a home-loan investment runs over a long period.
For example, if you have a R1-million loan over a period of 20 years at a fixed rate of 8,25%, then your repayments in interest alone will be R1,045m.
If the rate is 1% less (7,25%), the total interest payable will be nearly R150 000 less.
You can calculate the differencea lower rate can make to your monthly instalment and overall bond costs on website bond calculators (see Get more advice).
4. DO THE SUMS TO CONFIRM IF YOU REALLY WILL SAVE MONEY IN THE LONG RUN
Ask the bond division of the bank you’re considering switching to for a summary of exactly which costs the bank pays, which costs you pay and how much you’ll save in interest by moving your bond.
The new bank could also offer to extend your bond over a longer period – say for example you had 15 years left of a 20-year loan, the bank could make it 20 years again.
But remember, this means you’ll be paying off interest over a longer period, so it can still work out to be more expensive for you even though your monthly instalment will be lower.
5. THINK CAREFULLY BEFORE YOU DECIDE TO FIX THE INTEREST RATE OF YOUR NEW BOND
When you take out a home loan, the interest rate is usually variable because it’s linked to the repo rate of the SA Reserve Bank.
This means your monthly repayments can decrease or increase, as happened with the recent rate hike.
If you fix the interest rate of your home loan, it will remain the same for a fixed period of say 12, 24, 36, 48 or 60 months.
Interest rates are normally fixed at a rate higher than the variable rate, say 2% higher.
Because it’s fixed at a higher percentage, the variable rate will need to increase to considerably more than your fixed rate before you save money this way.
6. YOUR CREDIT RECORD AND FINANCES SHOULD BE IN GOOD STANDING
When you switch, you’re essentially applying for a new home loan with a different bond provider. It’s still an application that needs to be approved, so your new provider will do a credit assessment to see if you can afford the new loan.
If your financial situation deteriorated since your initial bond application, there’s a chance it won’t be approved – or that you won’t get the interest rate advertised.
GET MORE ADVICE
- Bond calculators on websites such as property24.com, ooba.co.za and betterbond.co.za
