Homeowners struggling against the rising costs of living – including inflation and interest rate and fuel price hikes, may not know that there are ways they can save money on their home loan repayments.
Property buyers purchasing for R1.1 million and below will save on transfer duty costs following the recent increase in the exemption threshold, while those who are shopping around for the best home loan interest rates will benefit from the competition between banks.
But existing homeowners who don’t think they have options for reprieve, are wrong.
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Rhys Dyer, chief executive of ooba Home Loans says the succession of interest rate hikes has had a “big impact” on existing homeowners who are now paying more on their home loans. Thankfully though, there are “several ways” they can reduce the financial burden of home loan repayments in tough economic times.
These include renegotiating the interest rates and repayment terms on their home loans; applying for payment holidays; or even applying for the Government’s Flisp subsidy retrospectively.
FOR HOMEOWNERS
– Renegotiate the interest rate on your home loan
First and foremost, Dyer says, homeowners have the option to renegotiate the interest rate on their existing home loans by approaching their banks.
“This is provided that your home loan is in good standing – paid on time each month. The bank will also be more inclined to agree to a lower interest rate if the value of your property, compared to the original loan amount borrowed, has increased, meaning that the bank's loan-to-value (LTV) ratio and the associated risk has reduced.”
– Renegotiate the repayment term on your home loan
Homeowners can also apply for an extension on the remaining term of their home loan to reduce their monthly bond repayments.
“For instance, if you initially applied for a home loan over 20 years, you can request that the home loan term be reset back to 20 years or even extended over a longer period of up to 30 years,” he says.
However, the homeowner will need to agree to the updated terms and conditions, and will be subject to a higher total interest charged over the extended loan term.
– Apply for a payment holiday
While payment holidays were widely requested during the Covid-19 pandemic and have their financial drawbacks in the long-term, Dyer says it is an avenue that homeowners can take for short-term relief.
“In this case, you should contact your Bank to request a payment holiday or to pay a reduced loan instalment for a short period of time. These payments, and the interest accumulated, will need to be repaid over an agreed number of months following the expiration of the payment holiday period.”
– Take advantage of Flisp
The Finance Linked Individual Subsidy Programme is a government project that works to close the gap in the home buying market.
“South African first-time homebuyers with either a single or joint gross monthly household income of between R3 501 and R22 000 can qualify for Flisp. Subsidies range from R30 000 to R130 505,” he explains, adding that existing homeowners who meet the criteria but have never previously applied or received the subsidy, are still eligible to receive it retrospectively. This is provided that the application is made within 12 months of bond registration.
“Upon approval, the subsidy is paid to your home loan account; it reduces the bank’s risk and enables you to re-negotiate the interest rate on your home loan.”
– Save to soften the blow
Homeowners who have money set aside may consider taking a percentage of emergency savings and depositing these into their bonds.
“Paying more than your regular monthly home loan repayment each month will reduce the total interest charged in the long-term. This is also a great way to enjoy tax-free savings.”
Echoing this, Carl Coetzee, chief executive of BetterBond, says homeowners and buyers can pay extra into their bonds and “shave years off” of their repayment periods. For example, on a R2m home loan at a prime lending rate of 10.5%, a payment of R1 000 extra a month could reduce one’s loan period by almost three years and save R461 187 in interest.
Adrian Goslett, regional director and chief executive of RE/MAX Southern Africa, says the biggest benefit of settling a home loan faster is that, over the loan term, owners will save on interest costs.
“Once your home is paid off, then your monthly expenses decrease, which means that more money is freed up to deposit into things such as retirement savings or other debt repayments.
“Another great advantage is that you also minimise your financial risk and when you do eventually sell, you’ll make a greater ROI (return on investment) on the sale if you have less outstanding on the home loan.”
In addition, if one has an access bond facility, they can treat their home loan accounts as savings accounts by depositing any extra cash they might have into them.
“You can then later access this capital through your home loan if an emergency arises, Goslett says.
FOR HOME BUYERS
While there are a number of factors to consider, Coetzee offers these five ways buyers can help reduce their monthly bond payments in order to comfortably afford their dream homes.
– Work with a bond originator
A bond originator will apply to more than one bank on a buyer’s behalf for a competitive interest rate. Again, using the example of a R2m bond, a prime lending rate of 10.5%, and BetterBond’s average interest rate reduction of 0.61% when applying to four banks, he says one could save R813 a month.
– Save up for a deposit
A deposit will affect the gross monthly income required to qualify for a bond, and will reduce the monthly bond repayments and interest payable over the loan period, he states. Banks also look more favourably at a client who is able to manage their money, and a deposit suggests that a client is a lower lending risk.
“A deposit will therefore make a significant difference when banks decide whether to approve or decline a bond application.”
– Maintain a good credit score
Banks are more likely to offer a competitive interest rate if one has a solid credit score and presents less of a lending risk.
– Weigh up the pros and cons of fixing your interest rate
While the choice is a personal one, Coetzee says it is worth noting that fixed rates are generally higher than the base or prime lending rate, and can only be negotiated once the bond has been approved.
“Also, the period over which you can fix the interest rate on a bond repayment is a maximum of five years.”
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