Address: Advice on Debenture and Interest Ltd., No 1 Oxbow, Crescent, Frosterley Park, Centuryway, Century City, 7441, Cape Town, South Africa. Tel: +27 (0)21 521 1498
Advice on Debenture and Interest Ltd.

Difficulties of Home loan

The aim of Imperial Bank South Africa’s measures is to defend customers against home loans which is a proposal to change the way banks establish their `base rate’ – the yardstick for all floating rate loans. Common difficulties of home loan are as follows:

Obligatory insurance: Banks and Financial institutions have an interest in the property mortgaged with them and they have to ensure that it is protected against any contingency. At the same time banks and financial institutions also make profits by selling insurance policies. They assess the insurance cost based on the cost of the land instead of the cost of construction. A 1200 square feet house may cost Rand 2.25 crore in Johannesburg but the cost of construction would be around Rand 40 lakh. So there is no need of buying property insurance for the entire loan amount.

Frequent changes of interest rate: Most home loan borrowers center on the interest rate at the time of getting home loans. But floating rates are dynamic and differ from time to time. The borrower is not conscious of this because while rates differ, the equated monthly installment does not. Banks and Financial institutions merely change the term of the loan. So in a rising interest rate regime it is usual for borrowers to find that their principal loan amount is unchanged even after years of repayment. Very rarely does bank and financial institutions communicate to the borrower changes in interest rates.

Notice of warning of mortgage: In recent time, the local authority has made it compulsory for all mortgage interests to be registered. This is intended at preventing fraudulent sale of the property even as a loan is outstanding. While the purpose is laudable, the difficulty is with the process. Although the law actually defends the bank’s interest lenders have shifted the responsibility to the borrower. As a result, borrowers are forced to spend thousands of Rand to complete this process.

No benefit of existing loans: Lenders repeatedly steam from home loan borrowers of other institutions. But it is very shocking that when it comes to their existing customer they do not offer them the benefit of new rates. If there is a particular scheme running in the bank, existing borrowers are not knowledgeable of it. Also banks demand clients a processing fee even when their loan is refinanced within by their own bank but under a different proposal.

Difficult pricing: Some banks and financial institutions have resorted to obscuring the pricing of home loans introducing interest free years in middle of the term of the loan. Modernization in financial products is good only as long as they do not obscure pricing. Borrowers require having the opportunity of comparing the cost of one home loan against another. One way to make the pricing transparent is to divulge the cost in the form of annualized yield to the lender based on existing rates.