Any lingering hopes that banks might have to backtrack on home loan rate
increases were dashed this week when the Appeal Court ruled that banks can,
from time to time, adjust the interest rate you pay on your home loan.
But the good news for home owners is that there is a strong chance of more
rate cuts in the near future.
Bigger than usual drops in the repo rate - the rate at which the Reserve
Bank lends to the banking system - this week set economists speculating that
the central bank might be signalling the need for another interest rate cut.
Tito Mboweni, the Reserve Bank governor, told parliament that he was "fairly
comfortable" with economic indicators such as inflation, money supply growth
and the balance of payments, though he warned that big cuts in the repo rate
would not necessarily be the order of the day for the rest of the year and
that if inflation picked up again he would act.
A fresh cut in home loan rates would be the fourth since mid-year and the
eighth since the beginning of the year.
A cut from today`s level of 16,5 percent would bring the home loan rate to
its lowest level since November 1994.
An interest rate cut would be some consolation for home owners who had been
hoping to get money back from banks until this week`s Appeal Court decision.
Their hopes were dashed when the Appeal Court ruled that the clause in your
home loan contract which gives the banks the right to vary your interest
rate is "perfectly valid", as long as the banks do it reasonably.
The decision affects home owners with mortgages totalling almost R200
billion.
The Appeal Court judgment comes after several High Court cases, over the
past 18 months, contesting the powers of banks to adjust interest rates.
Three of these cases, against NBS, Absa and Standard Bank, went to appeal.
Deputy Chief Justice H J van Heerden pointed out that home loans are no
different from overdraft agreements, where the bank has the right to
increase the interest you pay on your overdraft.
It was "unobjectionable", he said, for one party to a contract to have a
right to determine payment.
But your bank`s power to change payments was limited, the judge said, by the
obligation on the bank to exercise its discretion reasonably.
Murray Leyden, head of legal services at NBS, says that the judgment has
eliminated many months of uncertainty.
Your rights, he says, are protected because the bank has to act
"reasonably".
"We have always contended that it is really the market, not the banks, which
sets the interest rates and that banks vary their rates in line with market
forces, including the cost of money."
The judgment is good news for some borrowers and bad news for others.
Some would have benefited from a ruling against the banks, but others might
have found themselves paying more money to their banks, depending on what
interest rates they signed up at.
Meanwhile, if you are one of the rash home owners who stopped their monthly
payments pending the results of the Appeal Court hearing, you would do well
to go and see your bank in a hurry.
The ruling will have limited impact on you if you have been faithfully
keeping up with your home loan repayments.
But if you have withheld payment to your bank and pinned your hopes on the
Appeal Court cases finding in favour of consumers, you could find yourself
in hot water.
It means you are behind with your instalments and are currently being
charged interest on interest.
Even more serious is that you are technically in breach of your home loan
contract and your bank may call in the loan.
The best thing to do under these circumstances is to contact your bank
immediately and negotiate how you can settle the backlog as quickly as
possible within your budget and meet your monthly repayment
commitment.
Some Tips
b
Shop around for the best home loan rates before you sign up with
a bank;
Negotiate the best rate you can - the first rate the bank offers you is
not necessarily the last;
Once you have a loan, make an extra payment whenever you can. Even R20
extra a month on a R150 000 over 20 years makes a difference of R26 600 in
interest and you can slash the term of your 20 year bond by 14 months;
If interest rates come down, continue to repay your loan at the same rate,
you will save yourself a substantial amount of interest;
Try to make your home loan repayment before the due date each month - the
earlier you pay, the more you will save because your interest is calculated
on the daily loan amount outstanding;
Consider locking yourself into a fixed rate if you want certainty for
your monthly budget; and
You may be able to get a lower interest rate by consolidating all your
debt - home loan, overdraft, car, credit card - into one package. But these
packages are usually aimed at people with hefty incomes and assets.