The Discovery home loan is the latest product from the financial giant, offering an interest-rate discount to qualifying clients. But is it worth switching?

Discovery Bank recently launched its home loan offering, which is a joint venture with SA Home Loans.

As usual with Discovery, the company is using a rewards-based approach to offer its clients the opportunity to receive a further interest-rate discount of up to 1%. So, should you switch?

Discovery follows what it describes as a “shared-value” approach. In essence this means that the discounts you receive are based on your behaviour (that could be financial or health) and the number and type of Discovery products you have.

How the interest-rate discount works

Applicants for a Discovery home loan will qualify for a market-related interest rate based on the normal risk criteria that banks use to determine the personal home loan rate. This rate is guaranteed; however, clients will be able to save even further through interest-rate discounts if they meet various criteria.

The interest-rate discount is discretionary and is re-calculated each month.

To qualify for a discount, clients would need to have an active Discovery Bank account with Vitality Money.

The level of discount is based on the main applicant’s Vitality Money status, and whether they have certain products from Discovery Life and Discovery Insure.

You receive a discount of up to 0.25% for having a qualifying Discovery Bank product, up to 0.25% based on your Vitality Money status, and up to 0.5% by having Discovery Life and Discovery Insure products that relate to your home loan.

Clients who live in a sectional title property will not be able to apply for Discovery Insure’s building cover and would therefore only be able to qualify for up to 0.875% discount.

How to achieve the full 1% discount

To get the maximum discount of 1%, a Discovery Bank client would need to have a transaction account with bundled fees or a Discovery Bank Suite. These would provide the full 0.25% discount for a Discovery Bank product.

The full 0.25% discount related to Vitality Money would require Diamond status (members on Gold only receive 0.15% and Silver 0.1%).

To reach Diamond status, you need to earn 80 000 Vitality Money points by fulfilling a range of criteria related to savings, debt, retirement funding, insurance (short term, long term and medical), and your net asset value (where your long-term assets minus your secured debt needs to be greater or equal to your long-term asset target – this is calculated for you).

You can also earn points by having a budget and sticking to it.

Even if you took out a Discovery Life Home Loan Protector policy as well as the Discovery Insure building and home contents cover, you would only get the full 0.25% discount for each product if you are on Diamond status with Vitality Money.

This means in order to receive the full 1% discount, you would need to be in a free-standing home, maintain Diamond status on Vitality Money, and have all your home loan insurance-related products through Discovery.

Should you take out a Discovery home loan?

For someone who is already a fully engaged Discovery client on Diamond status, the Discovery home loan would make a lot of sense.

However, one of the challenges with reward systems is that the goal posts can be moved. Over time, the requirements to remain on Diamond status may change, and 20 years (the term of most home loans) is a long time.

So the home loan needs to make financial sense on its own, without any discounts. Any discounts should  be regarded as a bonus.

If you are deciding to take a home loan for the first time, shop around for quotes. Compare the regular interest rate Discovery offers you to the rate offered by other banks. If Discovery Bank matches another bank, and you are already an active Discovery client, then it makes a lot of sense to benefit from a possible further interest-rate discount.

But if you can get a better rate at another bank and you are relying on your financial behaviour to get the reduction, that may be a riskier strategy. For it to make sense, you would need to look at the difference between the rates and decide whether you can sustain the requirements for the discount.

If you are not currently an active Discovery client and would need to take out Discovery products, you need to check whether you would be getting a good deal on those products. You don’t want to be in a position where the interest-rate saving is simply offsetting higher fees.

If you are an active Discovery client and thinking of switching an existing home loan, understand the transaction fees. There will be bond origination costs and you need to work out if the lower interest rate is enough to offset those costs.

As with any discount offered through a reward programme, always check that it works for you – that it would actually save you money, and that you can sustainably meet the conditions that are set.

This article first appeared in City Press.