Negotiating your loan interest

Most people don’t like negotiating (especially interest rates for your home loan) – yet sadly in a capitalist society, we need to, if we want the best deal. Interest rates are small numbers with a huge difference. In the example below, Maya Fisher-French (form Maya on money) explains the small difference:

If you manage to get a 0.25% reduction in your mortgage rate, the monthly saving may seem small. For example, on a R1 million mortgage a 0.25% reduction will save you R165 per month. Over a full 20-year period that would save you R39 600.

Before you get a home loan

Many people don’t know it, but you can do quite a lot from your side to get a better interest rate – even before you apply for one! Here are some things you can get in place:

  • Credit score – you get a free credit report every year from all major credit bereaux. Use it to clean up your credit score.  
  • Deposit – saving for a deposit will allow you to negotiate for a better interest rate, as you have something to lose as well!
  • Salary/Income/Job – The length of time at your job and steady income will count in your favour once applying.

Negotiating when applying for a home loan

Everyone knows the bank has a secret list. They take all the things on this list and add it into the magic machine, which in turn will give you a result of how much your interest rate will be.

It is therefore imperative when applying for a home loan, to give the bank as much information as possible, so that the bank can make an informed decision. We know that the following are on the list:

  • Level of education
  • Employment length
  • Disposable income and expenses
  • Credit rating – credit score, defaulting of debt, debt review, summonses etc.
  • Property purchase price – is this market-related? If this is undervalued, they will be willing to drop the price.
  • Deposit – I use this as my final trump card – I personally apply for a 100% loan, and after their final offer, I negotiate what the interest rate would be if I paid, e.g. a 15-20% deposit. 

Remember: the banks are there to make money – and they want to do so securely with the lowest amount of risk possible. It’s worth mentioning that some banks (especially FNB) will give you a discount on your interest rate if you move your transactional account to them. They even will give you a discount if the amount is not taken from your bank account, but directly taken from your employer to the bank. 

Negotiating when you have a home loan

When you have had your home loan for more than 24 months, you are able to negotiate your interest rate. In general, some banks (specifically Standard Bank) does not negotiate the interest rate once the contract is signed. 

With other banks, there are a few ways you are able to negotiate:

  1. When you have paid more than 15 % of your home loan and have been paying every month at the correct time
  2. When you have more money in your mortgage account than you should have – the bank will see this as lower risk
  3. When you have something on your risk profile that has changed for the better.

Personally, for my investment properties, I like adding the following: “I treat my properties as a business, and would like to keep doing business with you (Bank X)”. 

Conclusion

It’s worthwhile for some people to move their home loan if they would get a better deal elsewhere. Although this can be an option, all calculations and costs must be known to make a decision that will be in your personal interest.

Negotiating with the bank is something that can save you a lot of money.

If you don’t ask, you don’t get – so why not ask your bank for lowering your interest rate?

Happy investing!

Sources consulted