An independent forensic auditor has cast doubt on denials by NBS that it over-charged borrowers for their home loan repayments.
Although NBS recently paid R60 000 to an aggrieved former home loan client, the bank has denied that it over-charged home owners on interest rate calculations. NBS says it did not admit liability and is confident that its interest charges were legal.
However, forensic auditor Greg Johnson says in another case he investigated there is evidence that the borrower was incorrectly charged by NBS. The interest charged did not fully reflect all the repayments made by the borrower, he says.
Personal Finance showed Johnson NBS home loan accounts to find out whether there was any substance to claims that the bank's interest calculations had failed to fully credit borrowers for repayments.
Noel Young, the divisional director of mortgage lending at NBS, says the bank cannot find any evidence of charging interest without taking into account every payment.
At issue is the way NBS calculated interest on home loans in the 1980s when it was a building society. Since then, NBS and all the other former building societies, have switched to using the same calculation system as the banks.
For borrowers, the crucial point is that you must derive benefit from all the payments into your home loan before interest is next charged, Johnson says.
For example, if you pay all your instalments on time, you would expect a 20-year bond to be fully paid after 20 years. But if the banks' computers calculate the interest owed without taking into account your latest repayments, you will never repay your loan.
For instance, on a R123 000 bond over 20 years you would still owe R133 960 at the end of the 20-year period, according to Johnson's calculations.
Young says the Usury Act, which governs lending practices, stipulates when banks can add interest to your outstanding mortgage. Simply put, the Act says a bank cannot charge you interest before the date on which your monthly repayment falls due. This means the bank must take into account all repayments before calculating interest.
The day on which your payments are due varies from bank to bank and is specified in your mortgage loan contract.
Most banks, including the former building societies, calculate the interest that you owe on a loan on a daily balance and add it all to your account at the end of the month. This is called "charging interest in arrears". This system does take into account all the repayments you make and gives you credit for each day that money stays in your account.
Borrowers can make the most of this system by:
Making payments on time
Late payments can make an enormous difference to the interest that you owe over the life of the loan.
In the case of a R300 000 loan, for example, if each instalment was due on the first of each month, but you paid on the fifth of the month, then six months into the bond you would owe R33 more in interest than if you had made your payment by the due date. Over 20 years, your late payment (by four days each month) would add up to R8 445 in additional interest.
Making the first payment early
The date on which your mortgage bond is registered - the day the bank gives you the money - and the date of your first payment are critical.
If, for example, your bond is registered at the beginning of a month and you make your first repayment the next day, instead of at the end of the month, you will effectively be a month ahead with your payments. This will make a big difference to the interest you will pay over the term of the loan.
On the same R300 000 loan over 20 years at the current rate of 14.5 percent, you would normally pay total interest of R623 035. But if you made your first payment early, this amount would drop to R564 077 and you would repay the loan in 18 years and nine months.
Paying in additional amounts
If you pay additional amounts into your home loan, then you will repay it faster and you will be making what is effectively a tax-free investment.
For example, if you pay R5 000 into your bond, you are getting the equivalent of a 14.5 percent return on your money tax- free, assuming you are paying 14.5 percent for your loan.
The best interest rate you could get on R5 000 if you invested it elsewhere would be about 10.75 percent a year. But because you pay tax at your marginal rate on any interest income of more than R3 000 a year (for under 65 years of age), you are effectively earning only 6.23 percent interest on your R5 000 investment (if you pay the marginal rate of income tax at 42 percent).
It is wise to put any extra money that you have into your bond, even if it is only for a few days. Because of the way banks calculate interest - on your daily balance - if you can reduce your balance, even for a few days, you can save yourself interest.
If you need the money again later, provided you have an access facility on your home loan, you can draw the money out again. Bear in mind that you need to apply for an access facility and that there may be limits on the number of withdrawals, and on the amounts you can withdraw each time.