Who would have thought that there was an upside to the worldwide economic recession, which has also had an effect on the South African home loan industry? The positive side of the fact that fewer people are applying for home loans and fewer people are being granted home loans, is that banks and lending institutions are a lot more competitive when it comes to attracting clients. For this reason it has over the past few years become possible to take a close look at your original home loan interest rate, and to shop around for a better rate.

How to find a better home loan

The introduction of mortgage originators or bond originators into the home loan market has made the whole process of “shopping around” a great deal less cumbersome and complicated. A bond originator will namely do the donkeywork for you, and negotiate with different banks and financial institutions on your behalf. The best part is that the services of a bond originator are free: the costs will be passed on to the lending institution to which you switch your home loan, should you decide to do so, and the bond originator and the bank are both prohibited by law from passing the fee on to you or making it a part of the loan amount.

If another lending institution offers you a more advantageous home loan and you decide to switch, a valuation of your property will be done. If the property passes this inspection and final approval is granted, you can give your current lending institution notice that you intend to switch. Normally 90 days’ notice is required.

Conditions and risks

• There may be some conditions to switching, such as that you may not switch your home loan to a different institution within six month of first registering the loan.
• Secondly, there are likely to be some legal fees (not the fees of the mortgage originator) incurred when switching home loans. Find out beforehand what these fees will be, so that you do not end up paying more in fees than your saving in interest will be.
• Another factor to consider when switching is that you may lose a long-established relationship with your financial institution. In this case it may be possible to use the offer of a better interest rate from a different institution to negotiate a more favourable rate with your own financial institution. In response to the new trend of customers switching home loans, banks have responded with the introduction of the so-called “cancellation rate” or “defend rate”. When a customer threatens to move to another financial institution, the bank may offer a further interest rate concession in order to prevent the customer switching.
• As a rule of thumb, the costs involved in switching home loans are generally around 1% of the value of the loan and are usually recovered within 18 months of making the change.

Even if you ultimately do not decide to switch home loans, in today’s economic climate it is certainly worth looking around and discussing your options with your financial institution – whether you switch or not, you may end up saving yourself thousands.