The current bank war over fixed and capped home loan interest rates may be very enticing, but you should be aware that there may be cost implications if you want to cancel your loan.
The fixed and capped rates, which are normally set for a period of between one and two years, are attractive because they are lower than the variable rates, which go up and down according to the Reserve Bank's interest rate policy.
If you opt for a fixed or capped interest rate and sell your home or come into money which allows you to pay off your bond during the set period, you may be in for an unpleasant surprise.
If you want to get out of the contract early some of the banks have prohibitive penalties as much R15,20 for every R1 000 you owe. On a R100 000 bond this would mean you would have to pay the bank R1 520 in penalties.
The Usury Act gives financial institutions the right to charge these penalties for early cancellation of loans, but it is up to the individual banks to decide whether to charge you and if so, how much.
Penalties may also be charged for early repayment of a variable interest home loan, but this is not normal practice. Some banks charge a fee if you repay a variable interest home loan in the first year.
A Personal Finance reader was shocked to find out that she would have to pay in cancellation charges on her loan.
Doris Anne Jansen, from Port Elizabeth, took out a two-year fixed-interest contract on her R98 000 housing loan from Standard Bank last year.
She is now considering selling the property and the branch manager has informed her that the termination charges are R15,20 for every R1 000. This means she will have to pay the bank almost R1 500.
"As a client for 34 years, I trusted that the agreement's clause about unspecified additional finance charges being payable for early termination of the loan was only a matter of a couple of hundred rand for the costs of the termination.
"My concern is that this charge is a significant amount and as such should have been stated in the agreement form, in the interests of disclosure and transparency," she said.
Duncan Reekie, divisional general manager at Standard Bank says, the bank does, wherever possible, disclose its charges upfront.
He says with fixed and capped rates, "it is not possible to quote the specific early termination charges on the application form" because "the application form for a fixed or capped rate is a generic form".
The customer chooses between a 12-month, 18-month or 24-month contract and decides whether to pay the capped premium monthly or as a lump sum upfront.
Reekie says "the additional finance charges for early termination are therefore dependent on which options the customer has selected and the unexpired term of the fixed contract".
The early settlement penalty is not charged if the unexpired portion of the facility can be transferred to another loan.
Should Jansen cancel her contract because she has sold the property, and take out a new bond with Standard Bank within six months, the bank will refund the entire amount she has paid in additional charges, Reekie says.
Regarding capped rates, Reekie says if a customer with a loan at a capped rate decides to end the contract, the customer will be required to pay the agreed capping fee until the end of the contract, unless this had been paid in advance.
If you accept a capped rate, you choose to limit your maximum interest rate for a fixed period.
Stuart Grobler, general manager of Council of South African Banks (COSAB), the banking industry's umbrella body, says Section 3 of the Usuary act does require disclosure of finance charges, but only in so far as these "may be known or determinable".
On a variable rate loan, finance charges are not known or determinable, because an increase in the interest rate cannot be predicted and the bank cannot know when the customer will give notice.
Derek Price, general manager of Property Finance at First National Bank, says the group's banks do not charge for loans which are cancelled.
Johan Geertsma, assistant general manager, communications and public relations for Saambou says cancellation fees are included in Saambou's loan contract, but the bank is flexible in applying clause.
"If the circumstances are out of your control, we will be lenient," he says. For example, if somebody is transferred to another town by their employer, Saambou will either waive the fee or charge a reduced fee, he says.
You must give the institution 90 days notice if you are planning to settle your loan in full, he says.
Saambou is allowed to charge three months interest on the outstanding amount in terms of the Usuary Act, he says.
Richard Gahager, general manager mortgage loans at Absa says that when it comes to charging the fee, it would depend on the circumstances under which the loan was cancelled, and whether or not you are returning for another loan with Absa.
Where a client had chosen a fixed rate, the bank will probably charge you a fee because of the costs it incurred in making the loan available to you, he says.
Absa reserves the right to recover up to one percent of the outstanding amount from you if you terminate your home loan before the end of your contract.