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Should you renegotiate your mortgage rate?

Apr 1, 2019

Even a 0.25% reduction in your mortgage rate could save you tens of thousands of rands, but how open is your bank to the discussion?

Should you renegotiate your mortgage rate?Personal finance blogger Steathy Wealth wrote last year about how he managed to save himself R83 000 by asking his bank to reduce his mortgage rate.

He had been making his monthly payments plus a bit extra for the last two years and hoped his good track record would improve his credit rating and hence his mortgage rate. His current rate was only 0.05% below prime (9.95%) and his bank offered him a 0.25% reduction (9.7%) if he forfeited some of the available balance in his access bond – in other words, if he reduced the amount available to withdraw.

I decided to test out my bank and asked some readers for their experiences. The conclusion? Banks have different criteria for reducing the mortgage rate and some are more open to the idea than others.

No, not interested: For some readers, the bank’s response was a flat ‘no’ – they stated that they had already given them the best possible rate.

Move your account to us: Our bank offered to reduce our rate by 0.25% if we moved our main bank account to them. This seems to be a common strategy by banks: they are prepared to give you more discounts the more of your banking you do with them – which makes sense.

Tell us more: Some readers were asked to fill in new affordability and risk assessment criteria.

Borrow less: Some banks are prepared to lower the rate if the mortgage value decreased – which was Stealthy Wealth’s experience.

Borrow more: One customer was offered a lower rate if he extended his existing mortgage by taking out a further bond, or took out a new home loan.

Will your bank be open to negotiation?

I spoke to the banks to find out what criteria they would consider when it came to an application to reduce your existing mortgage rate.

Through the responses, FNB appeared to be the most willing to review a mortgage rate, which was borne out by our reader experiences.

FNB

According to Stanley Mabulu, FNB Home Finance Division Channel Management Head, in terms of FNB Home Finance Product Rules, “an application for a rate review can be submitted and possibly considered after 24 months since the date of registration of your bond.”

When making the assessment FNB would consider the following factors:

  • Credit score – if your credit score has improved since taking out the loan, there is a chance you could qualify for a better rate.
  • Variables of home loan account – if your income has increased significantly or if the value of your property has increased, those would be positive factors in negotiating a better rate.
  • Reduction of outstanding balance – if you have been paying extra into your mortgage and the original outstanding balance has been reduced by 15% equal or greater to the registered bond amount, FNB will consider a reduction in your interest rate. You need to decide if you are prepared to forfeit access to those pre-paid funds in order to have a lower rate.

Standard Bank

Standard Bank’s approach is to only offer a better rate if you extend the loan. The bank’s costs of running a mortgage book are fixed so a bigger loan would mean more profit, hence the ability to offer a better rate if you can afford the repayment.

“The most common option is where further lending is applied for as the repayment history is considered when the price on the further loan is negotiated”  says Andrew van der Hoven, Head of Homeloans at Standard Bank. “Standard Bank also offers additional value for customers who re-bond their property with Standard Bank or where additional properties are added to existing facilities.” Van der Hoven adds that most banks will offer better rates to their own customers, so it pays to have your primary banking with the same bank as your home loan.

Absa

Absa will assess on a case-by-case basis, but are not that keen even if your risk rating changes. “It is important to note that a home loan is a long-term transaction, entered into over a number of years,” says Geoffrey Lee, Managing Executive, Home Loans at Absa. “Mortgage interest rates are based on the overall risk profile of the customer at the time of inception of the home loan. In other words, the borrowing risk that the bank carries is based on the risk profile of the customer at the time of approval of the home loan. Given the duration of the loan agreements, it is probable that the circumstances of customers may fluctuate over time. With this in mind, it would not be practical for the bank to adjust the interest rates (either positively or negatively) whenever the customer’s risk profile or credit history improves or deteriorates.”

Nedbank

Nedbank is definitely not keen on re-assessing a customer’s mortgage. “We have provided the best rate at the time of application given their history with the bank and risk grading at the time. The National Credit Act does not allow banks to re-price customers whose risk profile deteriorates during the life of the loan and therefore Nedbank’s approach is to quote prices at inception for the duration of the loan agreement.”

You only save if you save

If you manage to get a 0.25% reduction in your mortgage rate, the monthly saving may seem small. For example, on a R1 million mortgage a 0.25% reduction will save you R165 per month. Over a full 20-year period that would save you R39 600.

The real power, however, is in using that R165 to pay extra into your mortgage rather than spending it. Over a 20-year period, by using that interest saving to pay extra into your mortgage, you would save R115 000 and pay off your home loan a year early.

The impact would vary depending on how many years you have left to settle your mortgage, but Stealthy Wealth calculated that a 0.25% reduction on his R925 000 mortgage with 18 years left would save him directly R33 000 but as he intends to keep his mortgage repayment at the same level as before the interest rate deduction, he will save a total of R83 000 over the next 18 years.

Is it worth moving your home loan?

According to mortgage originator ooba, banks are competing with each other for mortgage business and ooba’s statistics show that the average interest rate is 15 basis points cheaper year-on-year, which is a result of banks vying for business. Ooba says the average rate achieved for its buyers is currently 0.16% above prime and a home loan rate at prime would be considered to be a “good” rate in the current market.

If you have a good credit record, have been paying off your mortgage, or more, for several years and your rate is at prime or above, it may be worth shopping around. However, you need to consider the costs of changing such as bond registration fees. If you take the example of a R1 million mortgage, bond registration could cost you around R27 000. This would either be paid out of your pocket or added to your home loan which could largely negate the saving on your interest rate. Always ask for a full quote including all costs so you can make the correct comparison and if you do want to transfer your home loan, ask for a reduction in registration fees.

This article first appeared in City Press.

34 Comments

  1. Hi Maya
    I’ve had my bond since 2009 on my 1st permanent job. I’m am half way now and I would like to re-bond. The main reason for that is to pay it off in 5 years and cut out the other 4. Will this be the best option to pay off my bond sooner or should I just wait until I finish the remaining 9 years?

    Reply
    • It is very expensive to register a mortgage. It makes far more sense just to pay in extra. At any time you can pay in extra which will shorten the period of the home loan. You can even ask the bank to change your debit order so you automatically pay in more each month

      Reply
  2. Hi Maya. Do I get to choose between variable rate and fixed rate when I apply for a home loan?

    Reply
    • Yes you do although certain bank financing products are fixed – but you don’t have to take them

      Reply
  3. Hey Maya. I bought my first property a year and few months ago with FNB and now looking to purchase another one soon. Will they offer me a lower interest rate as it would be the second one or should I apply for a reduction on the current one before getting another?

    Reply
    • The interest rate will be determined by the current interest rates (prime is 7.25%) and your credit risk. If you have a good payment history on your first home, that could be positive, however, the fact that you are looking to take on more debt, could increase your credit risk. The bank may be concerned about your ability to meet both home loan repayments. The bank will only provide you with a home loan based on your exiting income – they will not factor in potential rental income. So it is best to discuss this with them and get a pre-approval on a home loan. Also consider that if you are intending on renting out the second property it is better to have the most debt on that property as the interest would be tax deductible from the rental income.

      Reply
  4. Hi, I have a bond with FNB home loans from 2014. Your article about asking the bank for reduction of rate has interested me to try it. With the pointers you make for qualifying I think I meet all of them although I understand it is for the bank to decide. I have been paying my bond extra for so long. I even called them in January this year after the first cut of interest rate. I was excited to learn that i have already cutted +-4years at the time i was doing that inquiry. I will call them again after the last week cut to see how many years i have left now and see if i can request the rate reduction.

    Reply
    • Great! Also keep your repayments the same as before the cut – helps pay off even sooner

      Reply
  5. Registration of a new bond while Switch to FNB

    Can I withdraw less amount than I have registered and how long will the remaining funds will still be accessible on the bond account?

    Example, the first withdrawal will be to settle the debt from the previous bond account when I ll be switching to FNB.

    For instance if I qualify to register a bond of R 2 million and I withdraw 1 million to settle the bond from previous bank, how long ll the remaining funds of 1 million will still be accessible for withdrawal?

    Can I withdraw any time when I am ready to use it?

    Will the repayment be based on only on the 1 million calculation interest charge? or for the 2 million as registered amount even if I withdraw less?

    Thank you for your advice

    Reply
    • If you do not draw on the line of credit it remains available based on the amortization rate. So if you have a credit line of R2 million for 20 years, it will decrease each year so that the credit available is zero in 20 years time. So it would reduce by R100 000 a year. Repayment is only based on the funds you have withdrawn. Think about a credit card – you may be able to spend up to R20 000, but if you have only used R5000 then interest is only charged on that R5000.

      Reply
  6. Good day
    I recently took out a R330,000 bond with ABSA and i am paying R350,00 extra on my repayments. how much of the impact does it have towards reducing the length of the bond?

    Reply
  7. Hi please note that I would like to know about a 20 year bond that I took in 1993 that I have which i am still paying for the past 27 years although I have been paying extra every month without fail from 1998 also considering the fact that I have a preferential interest rate of prime minus 1.5 to fnb so how is this possible? Please explain

    Reply
    • you need to ask the bank for the full amortization statement

      Reply
  8. Thanks

    Reply
  9. Good day,

    is it advisable to use access bond money to settle the car debt and remain with the one debt as a bond.

    For example , i have an offer of 9.20 % interest for my bond for 13 yrs and when i look at the current debts for my cars i still have 2 yrs to settle the debts.

    Please advice if it will be a good move to use the access bond to settle the cars debts and channel all the cash that i normal use to pay the car to my bond account monthly.

    Regards

    Reply
    • That does work as long as you pay the car finance payments into the bond – otherwise you end up financing the car over 13 years

      Reply
  10. I have a home loan with absa. Went to the branch to negotiate the rates. I spoke to the consultant and within 3 days my interest rate was reduced.

    Reply
  11. Hi. If we switch our bond to a different bank, does the 20 year period start over again? Also, do we need to pay attorney fees again?

    Reply
    • You can set the length of time of your mortgage – you do not have to select 20 years. You will pay bond registration fees again but you can negotiate these. make sure you do the comparison to see if it is worth it

      Reply
  12. Hi tx 4 an informative show. My daughter took out a hone loan 17 years ago in the interim. she lost her job and is paying R1 400 p.m. . Current debt is less R50k. However her Assurance (R800)) and admin fees takes (R200) . The remainder goes towards her bond
    Shouldn’t the assurance have reduced since her bond remainng is is less than R50 0 00. i

    Reply
    • It depends on the structure of the insurance. For example I have cover that reduces in line with my mortgage capital reduction but it is a set monthly amount over the whole period. However, she should certainly query it and even cancel for such a small amount

      Reply
  13. Hi Maya thanks very much for this info. My question is: Is it wise to make an extra lump sum maybe once a year (e.g. When you receive bonuses) to home loan or should one stick to monthly extra payments?
    And if lump sum works, what effect does it have on the home loan?
    Thanks Jeanett

    Reply
    • The sooner you pay money against debt, the sooner you reduce the interest. So, for example you would save more interest by paying R2000 a month than R24 000 at the end of the year, as you have started to reduce your outstanding balance sooner. But it all depends on your cashflow and what works for you.

      Reply
    • Thanks

      Reply
  14. Good day Maya,

    I read the same link from stealthy wealthy that you mentioned. I would like to try and email and see if I will get lucky in reducing my interest rate. Do you know what email address I could send the email to? My bond is with standard bank. Thank you

    Reply
    • I suggest you contact the home loans division telephonically. It is easier to dismiss and email..

      Reply
    • Hi. Did standard bank give you a positive response? I’m trying to get my bond interest rate reduced also.

      Reply
      • Hi.

        Somebody eventually got back to me last month, I could sign a concession letter to reduce the rate by 0.2% if I open an account with them, which I’m currently in the process of doing. Once that is set up I’ll cancel my nedbank account and just use the standard bank one.

        Regards

        Reply
  15. Why does bank not tell us about some of the important information you are giving us??

    Reply
    • Everything is out there… read up and educate yourself

      Reply

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Maya Fisher-French author of Money Questions Answered

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