I have watched in fascination the nonsense that has surrounded attempts to
disallow banks to vary homeloan rates as interest rates go up and down.
Much of the hype was caused by the very questionable interest checking
industry. At least one of these interest checkers decided to take on a
particular bank and challenge the practice of the bank being allowed to vary
interest rates from the initial interest rate quoted.
I am not going to deal with the legal technicalities of the case, but I will
deal with the moral issue involved.
Most of the people behind these attempts, in particular the interest
checkers, challenged the right of the banks to alter the interest rates long
after they applied to the banks for a bond and knew about the variable
rates. In other words, they accepted the position. At some stage, they
discovered what they thought was a loophole in the law, that would allow
them to challenge the variable interest rate practice. To me this is wrong.
By accepting the loan in the first place, knowing it was a variable rate,
they made a moral contract.
If a bank tried to change the rules in mid-stream, it would have brought
condemnation from everyone, including Personal Finance.
What I suspect is that at least one of the interest checkers was using the
case more for free publicity than anything else.
Interest checkers have uncovered some poor banking practices and
administration, which, after initial resistance, the banks did clean up. But
the interest checking industry is far from clean and makes totally
exaggerated claims to garner business from the unsuspecting.
Interest rates are a complex affair. Banks themselves have little to do with
the level of interest rates. The main determining factor for interest rates
is that amorphous thing called the market, and market direction is mainly
set by offshore investors.
If those foreign investors who put their money in local bonds (money they
lent to the government and para-statals, such as Eskom and Telkom) fear for
their investments, they pull their money out of South Africa.
When they do, government and other major borrowers have to pay higher
interest rates to be able to borrow money. It is the old story of investors
wanting a bigger return if they perceive they are taking higher risks. These
interest rates on bonds call the tune for most other interest rates. This is
what happened in June last year, when interest rates shot up by six percent.
The Reserve Bank fiddles around the edges, as do the commercial banks, which
make the homeloans. Banks are criticised for the gap between the rates at
which they lend money and the interest rates they pay you when you invest
money - but the trend is mainly out of their hands.
Anyway, back to the interest checking industry. It started up a few years
ago and has managed to ride much of the bad publicity the banks have been
receiving of late, about the gap between borrowing and lending rates (also
known as margins).
The approach is to try to imply that whenever the banks charge you interest,
they cheat you, and you can be sure to get back thousands in over-paid
interest.
There are various charging structures, but most have an up front payment,
which will vary on the duration of your loan, and then more, if a mistake is
made.
Most of these interest checkers use computer software programmes which
anyone can buy.
Here are some guidelines to using an interest checker:
-Treat with caution claims made by interest checkers about the millions
they have reclaimed from banks. The total amount is actually comparatively
low;
-Do not agree to pay any amount up front. At best agree to pay five percent
of any amount that is recovered from a bank in over-paid interest. Do not
pay anything that the interest checker claims has been over-paid - only pay
on what is recovered.
-If you suspect you may have over-paid interest, ask your bank to check
first. The probability of you having over-paid interest is low, particularly
now that banks are required to state what they are charging you, and the
fact that they must give you a month`s notice of any change in your homeloan
rate.
Although interest checkers do have a role to play, it is limited and it is
time they are subjected to a bit more scrutiny.