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Manage your bank for your home loan

14 Sep 2005

Business Day, Personal Finance - Maya Fisher-French

When Vivienne Jones decided it was time to do some renovations to her home and needed to increase her mortgage bond, she was surprised to discover that her bank was charging her the prime lending rate when most of her friends had bonds rates well below prime.

"When I initially bought my house in 1998 interest rates were very volatile and I wanted to fix my payments so that I knew what I would be paying each month. However for the last four years I have had a variable rate and I never thought to check what the bank was charging me" says Vivienne whois the head of a private school and earns a good salary. At the same time the value of her house has risen so much that her new mortgage bond is only 27 percent of the value of her home.

At first Vivienne spoke to her bank about negotiating her rate. They came back and said there was nothing they could do about it. Fortunately she decided to shop around. Another bank was prepared to offer her 1.5% below prime (9%) and to waive the registration fee (usually around R4,000) in order to get her business. She decided to give her existing bank another chance and they finally came to the party and matched the offer in order to keep her business.She increased her home loan from R200,000 to R400,000 in order to pay for renovations as well as to have cash on hand as she wants to buy a new car within the next year and financing it through her bond is far cheaper than vehicle finance which is usually charged at the prime lending rateof 10.5% or more.

For this reason she opted for an access bond. This way the money is available when she needs it without having to re-register her bond each time and she only pays interest on the amount she has actually drawn down and paid out.Once Vivienne utilises the full bond, the 1.5% lower rate will save her R400 a month on her monthly repayment or just over R94,000 in interest over the twenty year period.

"Because I initially budgeted for the higher payment, I have decided to continue to pay the extra R400 I have saved in order to pay off my loan sooner".This will result in her loan being paid off five years earlier and will save her a massive R121,000 in interest. So simply by shopping around to get a lower interest rate and using that saving to reduce her loan faster, Vivienne will save an incredible R215,000 in interest on her R400,000 loan. Ian Wason of Bond Busters, the first mortgage broker in South Africa, says that based on the way a bank assess risk, Vivienne's financial situation had all the necessary requirements for a better bond rate.

"Firstly she had a loan of only 27% of the value of the house. Therefore the chancesof a bank not being able to get its money back if she defaulted on the loan are minimal. Secondly, as a relatively high earner the monthly repayments on the R400,000 were far lower than the 30% repayment to income that the banks normally allow, reducing her risk exposure. Finally by increasing the size of her bond from R200,000 to R400,000 she has become more valuable to the bank as a customer, purely because she is now borrowing more, and hence they are prepared to offer her a bigger discount", explains Wason. Wason says for this reason it can be cost effective to register a higher bond due to the economies of scale in the bond registration costs. In doing this you can use your bond as an effective overdraft facility and consolidate any more expensive repayments, such as car finance, credit cards and existing overdrafts you may have into your bond.

However Wason warns that while this is savvy financial management, Vivienne does need to be aware that she is moving loans such as her car, from a 5 year loan into a 20 year loan."When our clients do this we always advise them to pay the same amount they previously paid on their car into their bonds, this way they can increase their savings even more dramatically".Wason says it is important that people start to reassess their mortgage bonds more frequently to make sure they are paying a good rate especially if their financial situation changes which in turn could improve their risk profile.

This is already the case in the UK and Australia where people see their mortgage bonds as separate from their bank account."Your bank is a functional organisation that provides a service. Your bond is simply a loan. There are no significant advantages with having your bond with your bank. Rather like insurance one should select a bond on product and price not brand. Then you should regularly re-examine that product and price for its competitiveness by reviewing what else is on the market."

This article was first published in the Weekend Post.

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