ThuthukaSA Home Loans receives requests from a number of customers wanting to change banks that have given them a home loan because they are looking for a cheaper home loan rate. In this radio interview https://soundcloud.com/user-768186920/heart-to-heart-18-mar-is-switching-bond-a-good-idea here we discuss some of the key considerations to switching a bond. Switching bonds is usually not in the customer’s best interests because the customer has to pay fees twice.
Question from one of listeners
I’m considering switching my bond from my current bank. Instalment is R4 900 but I pay R6 100 and the term is 17 years. With the new bank, the instalment will be R6 000 and term will be 10 years
I do not have ACCESS to my current bond & the Difference in interest rate is 2,5%. Any advice?
Some of the questions we address are
- Are there other factors that we should consider apart from the reduced interest rate and term of loan, when thinking of switching bonds?
- What are the hidden costs that of switching a bond?
- What is your advice to the person?
As is usual with such questions, there are a number of unknowns e.g. With the current bank / home loan
- Total bond amount?
- When the loan was taken?
- What is the interest rate?
- Is it correct to assume that the person bought the home 3 years ago hence the term is now 17 years?
Points to Note before we advise
Yes it sounds very attractive that the person will pay R100 less with the new bank i.e. R6000 yet pay off the bond in 10 years but in all likelihood, this is because of the fact that the new bank will grant a lower home loan because the outstanding balance on the current bond would have decreased due to the higher instalment and the fact that interest rates have really decreased.
She is looking at the instalment and the reduced interest rate ONLY
Likely Hidden costs that she is not considering
- Bond registration costs will be paid all over again and these are likely to wipe out the potential gains
- Initiation costs of about R6 100
- Evaluation costs
- PLUS, has she really shopped around for the best home loan rate or has she just approached this new bank only? another bank could give her an even lower rate?
SO the rule of thumb is;
It is almost always best to keep your home loan where it is
Try and negotiate with your current bank to reduce the interest rate – might not be lucky though based on own experience BUT with a WRITTEN offer from the new bank, she could try to persuade her current home loan provider to reduce and threaten to switch and based on that, they might agree to match or reduce current interest rate.
Term of loan
This is really not something to worry about. Ultimately your term of loan is informed primarily by the monthly amount that you pay. It is SAFE to keep the loan at 20 years and simply pay more then you have room to manoeuvre in the future should you need cash for anything. DO NOT lock yourself into a lower payment period.
Do you want a home loan to buy a home or get cash out of your home? Email firstname.lastname@example.org so we can negotiate a good rate of interest from the beginning then you don’t have to switch bonds at a later stage.