Switch? The Grass isn't Always Greener on the Other Side
Date: 2006-11-30
When I initially joined the mortgage originating industry, switching clients’ home loans from one bank to another was a very popular practice. However, the banks soon stopped paying mortgage originators commission on switches, as they felt it was not always in the client’s best interest and the only ones benefiting from this practice were the originators who received commission for every bond they placed. In other words, it was a money making racket!
However, this practice has once again reared its head, with some mortgage originating firms and even banks promoting “switch and save”. This led me to delve deeper to establish if “switching” is really a viable proposition for clients or whether originating firms are just filling their coffers.
Advantages of a Well-structured Home Loan
1) Excellent interest rate
2) A good and easily accessible access facility
3) Potential to grow your property investment portfolio
4) Acceptable terms and conditions
5) Minimal individual risk and asset exposure
6) Reduced costs
7) Effortless management
The interest rate is just a minor factor one should take into consideration when selecting a home loan option. However, it is often used as a trump card when attempting to convince consumers to switch. Clients who have switched may later find that; firstly, in order to access their facility, they need another bank account (an additional expense) and at times this facility is not available to them at all. Secondly, the administration fees ar e higher and thirdly, they have an overdraft facility at the same institution and now their bond has joined that portfolio, putting their home at risk. The list goes on …
What About the Cost of Switching?
For example, you have an existing bond of R500 000 enjoying an interest rate of prime less 1.3%. You now wish to switch your bond as you’ve been offered an interest rate of prime less 1.6%. The approximate cost of switching will be:
1) R1 114 bond cancellation fees
2) R13 375 penalty fees, if you haven’t given the bank 90 days notice of your intention to cancel the bond.
3) R6 200 new bond registration fees
4) R969 – R2 280 new valuation fees
5) R175 – R1 250 initiation fees
A total cost of approximately R22 000! And your saving? A total of a mere R101 per month. It will take you approximately 18 years to recover this expense.&nbs p; The “experts” will tell you that over the 20 year period you will save R24 214. The truth is that the average bond only last 7 years.
Many banks offer to pay these costs or part thereof for you, on condition that you don’t cancel your bond within three years. If this is the case, then still look into their access facility, the need for additional bank accounts, their administration fees and your existing exposure at the bank.
My Advice
Think before you leap! When requiring bond finance, ensure that you deal with a reputable firm that will guarantee you the best interest rate, will take your needs and existing exposure into consideration, explain the terms and conditions, give you comparisons of the products available and disclose all the cost involved, eliminating the need to switch at a later stage. Changing the initial arrangement could cost you a bundle.
Tess Rodrigues
Managing Director