Many people don't realise that home loans are just another commodity; everything is negotiable and you needn't be beholden to a financial institution that is not offering you competitive rates and good service. It is possible to take your bond elsewhere, and it's happening more and more.
Switching from one financial institution to another is a growing phenomenon in the South African home loans market and a sign of changing times. South African homeowners were once loyal to one financial institution. These days they are far more likely to shop around for the best home loan deal based on price and convenience, says Rob Lockhart-Ross, the head of mortgage loans at NBS.
And transfer of allegiance isn't limited to the time of purchase of a property. Nowadays it can happen during the life of a loan, when the competitive offerings of other financial institutions become irresistible.
Hannalie Crous, the head of products management at Standard Bank Investment Corporation, says most people transfer their home loans to get a better interest rate or better service.
New niche market players, such as SA Home Loans, have heightened awareness of the option of switching by specifically targeting customers who are dissatisfied with their existing home loan package.
Once home loans became just another commodity, the market was ripe for the entrance of mortgage bond originators - organisations such as MortgageSA that act as intermediaries between home loan seekers and home loan providers and earn a commission from the banks for each new client.
Lockhart-Ross says: The battle for customers and market-share is being fought mainly on the grounds of price and to a lesser extent on the level of the loan offered. The speed of approval turnaround is also an important factor.
Without exaggeration, a prospective home loan customer nowadays wants to know today whether his or her loan has been approved, wants the best deal in terms of loan size and interest rate, and wants the money paid out soonest.
In a competitive market, it makes sense for a financial institution to target those clients of its competitors who have a record of being able to service their loans. First-time homeowners are more of a risk.
The typical approach is to offer a lower interest rate and/or a higher loan amount to the homeowner. Some banks are quite aggressive about it and make direct approaches through cold-calling (phoning up clients and inviting them to switch).
Obviously, the battle for market share has had its effect on the pricing of home loans and the latest development is individualised pricing structures, in which low-risk clients are offered lower interest rates than high-risk clients.
Also, product differentiation has increased, with various loan products and interest rate options on offer, all priced differently, Crous says. For example, a home loan offered by one financial institution will be linked to the prime rate, while another institution will link it to another reference rate such as the Banker's Acceptance (BA) rate.
The prime rate is the lowest rate at which a bank will lend money to its clients on an overdraft, while the BA rate is an important short-term interest rate in the money market. BA rates are issued for periods of one, two and three months.
It is important that customers review the rates as well as the product offering before deciding where to take their loan, says Crous.
Too often customers make decisions based on what appears to be the best rate, only to discover later that the financial organisation chosen has a very limited range of products or is unable to offer alternative rate options. Fixed and capped rates are two options that offer protection in times of rising interest rates. Fixed rates speak for themselves, and capped rates are variations on the same theme: while they do fluctuate, they will not exceed the agreed capped rate negotiated with an institution.
Customers should also consider other factors, such as the bank's reputation and stability. This is particularly relevant in the light of recent events at Saambou, which was ranked among the more aggressive lenders in the home loans market. The troubled bank was put under curatorship early in February after a massive run on its deposits.
When switching a home loan, Crous says it is important that customers provide all the relevant information upfront, such as income, loan required and the value or purchase price of the property. This enables the bank to assess the request as quickly and efficiently as possible and provide the customer with its best rate.
However, the costs of a switch, such as cancellation fees, new bond registration fees and transfer fees, often outweigh the benefits and are a strong argument for changing banks only when you sell one home and buy another.
Lockhart-Ross urges homeowners who are approached by a new financial institution to make a full assessment of all the benefits and costs of switching their home loan. In particular, he says, you should approach your existing financial institution first to find out what concession it would be prepared to make, in the form of either an interest rate reduction or an increase of the loan. Given the high cost of sourcing a new client and originating a new loan, it is often worthwhile for the existing financier to match or counter the competitor's offer to retain his client's loan, he points out. And yes, Lockhart-Ross adds, customers squeeze as hard as they can for better offers.
The cost of switching your home loan
- Cancellation fee: This is normally a standard fee based on the loan size and is payable to the bank-appointed attorney who cancels the bond with the former financial institution.
- Bond registration fee: Payable to the attorney who registers the new bond in your name with your new financial institution.
- Transfer duty: This is a property tax charged by government. Following this year's Budget, transfer duty will cost you considerably less than it would have done last year, especially if you are buying a property for less than R100 000. Transfer duty is not applicable when you move your bond from one institution to another and leave it in your name. If you register the bond in the name of another person, however, you will be liable for transfer duty.
- Deeds Office registration fees: Payable to the Deeds Office for administrative services.
- Security Assessment fee: Payable to the bank for the services of the assessor who determines the market value of the property.
- Initiation fee: A once-off joining fee payable to the bank when applying for a home loan.
MORTGAGE BOND MUSCLE
Mortgage bond originators have operated in the home loans market for about three years, acting on behalf of prospective homeowners looking for the best available home loan rate from the big banks.
There are about 20 bond originators in the country and they source between 40 percent to 45 percent of new residential home loans.
Some bond originators, such as MortgageSA, one of the most well-established, do the full sourcing, processing and administration of the home loan. The good news is that there are no extra costs involved for the home owner. The bond originators get paid a commission or raising fee by banks, but this does not affect the administration costs of the loan or the interest rate.
Why use a mortgage bond originator?
To avoid the complex, often arduous experience of sourcing the best home loan deal, Saul Geffen, the managing director of MortgageSA, says.
He points out that bond originators can get home loan approval within 24 hours.
This article was first published in Personal Finance magazine, 2nd Quarter 2002. See what's in our latest issue