How to stay on top of rising loan repayments

Don't switch from one home loan provider to another unless you're sure that registering a new mortgage bond will cost you less in the long term.
October 27, 2007

By A'Eysha Kassiem

With seven interest rate increases over the past 16 months, you may well be finding that your budget is struggling to accommodate your loan repayments.

The prime lending rate has risen by a total of 3.5 percentage points since June last year, and many economists predict that the Reserve Bank may again increase the repurchase (repo) rate before the end of this year.

Depending on the size of your home, vehicle and/or personal loan, interest rate increases can add hundreds of rands to your repayments, and after the past seven increases you could be paying thousands of rands more than you were just over a year ago.

Ridwaan Kajee, the executive director or Oasis Asset Management, says if you have taken out a mortgage bond of R1 million at an interest rate of 14 percent, you are repaying R2 452 more each month than you were before rates started increasing last year.

Similarly, he says, the monthly repayments on a R100 000 vehicle loan have risen by R245, and it costs R173 a month more to service credit card debt of R50 000. (Click here for a table that shows how interest rate increases are affecting your debt repayments.)

These increases mean that consumers with that amount of debt now need to find R2 870 more every month than they did 16 months ago to service the same level of debt, Kajee says.

When you couple this with increases in the prices of petrol and food, consumers who have high debt levels are finding themselves under real pressure, he says.

Banks advise that if you are struggling to keep up your repayments, you should approach them and discuss your options.

Better home loan rate
When it comes to your mortgage bond, your best option is to try to negotiate a lower interest rate. This may be possible if you have repaid a significant portion of your home loan and/or the value of your property has increased significantly, which could mean that the ratio of your loan to the value of your property has improved significantly.

Paying a lower interest rate will enable you to reduce your repayments and the amount of interest you will ultimately pay.

If your home loan provider won't give you a better interest rate, you could ask it to restructure your loan over a longer term.

Most home loans are granted for 20 years, but the period can be extended to 30 years and your repayments reduced accordingly.

Gavin Opperman, the managing executive for Absa Home Loans, says if, for example, you have a R1 million home loan and you extend the term of your loan to 30 years at an interest rate of 14 percent, this will reduce your repayments by about R586 a month. Your repayments will then be nearly as low as they were before the two most recent rate increases.

John McGinn, Nedbank home loans product manager, says the bank will take the following into account when you renegotiate the term of your loan:

• What you can afford;
• The value of the loan relative to the value of your home; and
• The fact that you should repay your mortgage bond before you reach the age of 65.

Although a longer home loan term may bring you short-term relief, in the long run you will pay far more in interest over 30 years than you will over 20 years. So, if you choose this option, as soon as your financial situation improves, you should pay more into your bond to reduce the term over which you will repay the loan.

Consolidate debt
Opperman says another option is to consolidate your more expensive debt. For example, if you have a R1 million home loan and credit card debt of R50 000, you could increase your home loan by R50 000 and use this money to repay your personal loan, which probably attracts a higher interest rate than your home loan. This option will increase your home loan repayments by R621.76 a month (over 20 years at 14 percent).

However, it is not a good idea to repay a personal loan over 20 years.

In this regard, Absa offers a secondary account on its MultiPlan home loan option that can be used for debt you want to repay over a shorter period. If you set the repayment period for R50 000 in the secondary account to five years, your repayments for the secondary account will be R2 263 a month.

This could be a major saving compared with the repayments of R3 750 a month you would pay if you still owed on the credit card.

Fixing your home loan
Opperman says another option you could consider is to fix your home loan rate.

Financial institutions offer fixed-rate home loans on which the interest rate is set for a particular period and does not vary in line with the Reserve Bank's repo rate. Different home loan providers have different fixed-rate contracts.

Generally, when interest rates are thought to be at or near their peak - as is currently the case - you can obtain a better interest rate by fixing your home loan.

Remember that if interest rates do fall significantly soon, the variable rate could then become lower than your fixed rate for the remainder of your fixed-rate contract.

Absa's fixed rates are currently as low as 11.75 percent for 10 years (where the loan amount is less than 80 percent of the property value).

You should also be aware that your bank may charge you a penalty to switch from a variable interest rate loan to a fixed-rate loan.

Switching may cost more
If your existing home loan provider won't offer you a better interest rate and you don't like any of the other options, you could shop around for a lower interest rate because competition has recently increased in the home loans market.

But take note of what's on offer and any hidden costs that could see you dig deep into your pocket to try to save a few extra rands.

Your current home loan provider will charge you an early settlement fee, unless you give it three months' notice and make the normal repayments (including interest) on the loan during those three months.

The financial institution to which you switch your loan will also charge you an initiation fee on a new loan.

At both Nedbank and Standard Bank, the initiation fee is R1 000 plus 0.3 percent of the loan amount (excluding VAT), limited to a maximum of R4 500 (excluding VAT).

However, Standard Bank charges a flat initiation fee of R750 if you earn less than R8 600 month.

If you earn more than this, however, on a R700 000 loan, for example, the initiation fee will be R3 100 at either Nedbank or Standard Bank. On a loan of R1.2 million, the fee will be the maximum of R4 500, Standard Bank spokesperson Ross Linstrom says.

In addition to the initiation fee, moving a mortgage bond to a new home loan provider will also usually involve paying a registration fee on the new bond. These fees can be significant and vary depending on the attorneys involved. But they could be as much as R6 000 on a R500 000 loan and R9 000 on a R1 million loan.

Some banks, such as Standard Bank, are trying to attract new home loan clients by offering free bond registration and no initiation fees if you move your loan to them.

Absa, however, advises against switching. Opperman says switching could be "detrimental" to you over the long term, especially if you consider that you will probably get a new loan with repayments spread over 20 years, while your existing home loan may already be some years into its 20-year term and repaid in a shorter time.

"For example, a client who took out a R500 000 loan and has paid off five years' worth of instalments and switches his home loan to another financial institution will pay 51 percent more (R341 156) in interest if he reverts his loan back to the full term of 20 years," Opperman says.

Save it, don't spend it
He says it also depends on how you choose to spend the money you free up by switching your home loan. Although you will reduce your monthly repayments, if you use the money you save to raise your standard of living in terms of expensive holidays, cars or entertainment, it will lead to a marked reduction in your level of wealth.

If you do decide to switch your loan, you should always try to keep the bond repayments as high as your household budget will allow, Opperman says.

Instead of switching, you can ask your home loan provider to increase your loan term to ease the pressure on your budget, he says. When your finances have recovered, you can start increasing your repayments again.

"It might be a good idea not to lower the term but rather to build up some repayments as a nest egg for future use," he says.

Mary-Jane Lefevre, the regional finance manager for property finance sales at Mortgage SA, says you should rather renegotiate your interest rate or term with your existing institution rather than switch because of the costs involved.

Lefevre says your aim should be to pay off the home loan, not just to keep your head above water.

She also cautions that should you be looking to buy property, you need to do your homework to find the best home loan on offer.

While on paper a home loan offer may look like a saving, the interest could be massive, Lefevre says.

"There are a lot of bells and whistles on home loans on offer at the moment. At the end of the day, take a bit of pain for a better long-term option," she says.

Competition hots up
Some new players have recently entered the home loans market and this, together with much tougher lending requirements under the National Credit Act, has increased competition for your home loan business.

This could mean that if you are a good debtor you might be able to negotiate a better home loan rate.

It is understood that another financial services player will be entering the home loans industry early next year.

(Persfin, October 27, 2007)

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