Revaluing your home may give you a lower interest rate
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| Revaluing your home may give you a lower interest rate |
| By Neesa Moodley of Personal Finance | www.persfin.co.za As interest rates continue to rise, you, as a homeowner, may be wondering how you can get the best value out of your home loan without breaking your bank balance. You could take advantage of the recent increase in property prices to negotiate a lower interest rate on your loan with your bank. The net effect could be to hold your repayments at the same level as they were before the interest rate hikes. Barry Kaganson, the managing director of valuation firm Valuation Alliance, says having your home re-valued allows the bank to reassess the loan-to-value ratio, or the value of the outstanding loan as a percentage of the property value. The bank can then re-price the loan accordingly. This works particularly well for homeowners who have not had their homes re-valued in many years. It is becoming more common for people to switch their home loans from one bank to another (despite the bond registration costs), and banks are pricing interest rates quite competitively, particularly if there is a lower loan-to-value ratio, Kaganson says. For example, if you bought a house for R500 000 in January 2002, that house could be worth about R1.2 million today, based on the Absa house price index. Assuming that you had taken a 100-percent home loan initially, the loan would now be 42 percent of the property's current value. Depending on the amount of money that you have paid into your home loan in the interim, the loan-to-value ratio could be reduced further. A lower loan-to-value ratio implies less risk for the bank, and this means a lower required return on the loan, Kaganson says. However, you cannot rely on a generic house price index to determine the value of your home and should have a thorough independent evaluation of your property. Most banks carry out a property valuation when you apply for a loan and will do a second valuation when you apply for an increased mortgage or if you want to negotiate a different loan agreement. However, if you require a property valuation for a divorce settlement, you will have to appoint an independent valuer. Constant Loubscher, the chief executive of independent valuer Mirfin, says the company charges a flat rate of R970 for valuations of residential homes. However, the charges by other independent valuers could vary from R570 for a market value assessment to R1 500 for a comprehensive valuation certificate, including a full description of the property and all the fittings. A valuation on a property worth R500 000 will cost you R850 from SA Home Loans. Typical costs In terms of the Usury Act, the valuation fees charged by banks are clearly stipulated for properties worth up to R500 000. For a residential home, the bank can charge you 0.2 percent of the value, with a minimum of R100 and maximum of R850 (excluding VAT), Deon Swart, of the home loans division at First National Bank (FNB), says. If you are buying a plot and plan or a vacant site, the bank can charge you 0.5 percent of the value with a minimum of R250 and a maximum of R1 250 excluding VAT. Absa's valuation fee for loans above R500 000 is a standard R969, with an additional 0.2 percent on amounts higher than R500 000, and is capped at R1 750. The same fee structure applies if you are carrying out a re-valuation of your property. A valuation is performed by a registered professional valuer, taking risk factors into account. It is covered by professional indemnity insurance and carries legal weight in court - for example, in an insurance dispute. An evaluation is an estimate of your property value by a non-professional person based on information about recent property sales. A valuation can be used: For tax purposes; To increase the amount of the mortgage bond; To determine a reserve price for an auction; To determine a value for an apportionment of your inheritance; To determine the replacement value of the property for insurance purposes; or For a divorce settlement. Kaganson says that owners of commercial properties have a similar opportunity to renegotiate the amount of their loans. "Rentals have increased significantly in many areas over the last few years. Commercial property investors could have signed new leases with tenants over the past few years at higher rates since the initial negotiation of lending facilities - they should certainly consider using these to their advantage to try to renegotiate borrowing rates." However, the value of your property is only one factor in deciding an interest rate on your home loan, Ed Grondel, the head of home loans at FNB, says. Grondel says the rate you pay on your home loan is based on your individual risk, which is based on your credit profile, the home loan repayment to your income ratio and how you have handled your existing home loan. As a rule of thumb, your home loan repayment should not be more than 30 percent of your gross salary. Another option is to approach your bank for a fixed interest rate. These are available over a year, two years or five years. However, fixed interest rates are usually a more expensive option in return for your peace of mind when interest rates rise. A fixed interest rate on your home loan could be between 0.5 percent and 2.5 percent higher than the rate you would be charged on a variable interest rate home loan, which changes as the interest rate rises or falls. The fixed rate you are given by the bank will depend on the market at that time and your risk profile. Slight decrease saves you lots The effect of just a one-percentage point decrease in the interest rate charged on your home loan should not be underestimated. An example, a R500 000 home loan with a 10-percent deposit of R50 000 at 12-percent interest would cost you R4 954.89 in monthly instalments over 20 years. However, if the interest on the home loan dropped to 11 percent, the monthly instalment would decrease to R4 644.85, representing a monthly saving of R310.04. The interest paid in the first scenario amounts to R739 173.02, compared with interest of R664 763.46 in the second scenario, representing a saving of R74 409.56 over 20 years. Every bit extra helps You can pay a little extra into your home loan each month. This works favourably for your credit profile and reduces the interest on your home loan in the long term. For example, paying R200 extra a month on a R500 000 home loan at 12 percent interest raises your instalment from R5 505.43 to R5 705.43. This reduces the term of the loan from 240 months to 211 months, or from 20 years to just under 18 years, and you will save R117 457.49 in interest charges. |
