Does new home loan pricing mean you pay less?

In line with annual price guide revisions, Standard Bank has taken it a step further by reworking and introducing its home loan pricing structure. This may be a big win for consumers as it signals cheaper repayments and lower interest rates.

This week Justmoney looks at what this means for South African homeowners, existing and prospective, and how this will help them save.

Tip: To see whether you qualify for a home loan, click here.

How does it work?

A traditional home loan typically has a single interest rate, usually linked to prime, that is granted at the inception of the loan and applicable throughout the term.

Standard Bank’s new tiered rate structure changes this.

“In this new structure the interest rate applicable to the loan, while still linked to prime, is tiered into three categories. These categories are dependent on how much capital has been repaid,” says Andrew van der Hoven, head of home loans at Standard Bank.

This means that the interest rate reduces as more of the loan is repaid.

According to van der Hoven this is best illustrated by way of an example: In the case of a bond for R1,000,000 over 20 years in the tiered rate structure the interest rate will be as follows:

The portion of the loan between R800,000 and R1,000,000, will have an interest rate of 10.50% (prime + 0.25%). The portion of the loan between R600,000 and R800,000, will have an interest rate of 10.25% (prime), and the portion of the loan between R0 and R600,000, will have an interest rate of 10.00% (prime – 0.25%).

The weighted average rate of this loan would be 10.15% (prime - 0.10%).

“As a customer pays off his loan the weighted rate will continue to reduce until it reaches the lowest tier of 10% (prime – 0.25%). In effect, as the customer pays down the loan the interest rate will decrease. This gives customers a real reduction in their instalment monthly and in interest, saving them money compared to a traditional home loan,” says van der Hoven.

Simply put, the customer is not fixed to a single interest rate at the inception of the loan and the more the customer pays off the home loan, the lower the interest rate will be.

Is it cheaper for the consumer?

“In the example over the course of 20 years, this customer will save over R67,000 in interest compared to a traditional single rate loan priced at the same rate of 10.15%,” says van der Hoven.

“Furthermore, if a customer has additional funds to pay into the home loan, the customer can benefit from a lower rate and the savings will be even more. In effect, the more a customer pays off the less he pays in interest,” he explains.

In summary…

Standard Bank’s new pricing on its home loans benefit participating homeowners in the following four ways:

• The interest rate decreases as the loan is repaid. The customer is not stuck on a single rate for the life of their loan anymore.
  
  
• The minimum monthly instalment decreases as the loan is paid off.
  
  
• Significantly less interest is paid throughout the loan term.
  
  
• Customers are rewarded with a lower interest rate if they deposit additional funds anytime during the term.

Do you qualify?

Currently the offering applies to new home loan applicants.

“While there are exclusions, these are small and include building, development, cost inclusive, vacant land, and loans with greater than 40% deposits or in the name of a juristic person. Also, should a customer not want a tiered rate structure and prefer a single rate this is also still available,” adds van der Hoven.

He continued, adding that the new pricing is designed to reward clients for every payment they make on their journey towards owning their home.

Adrian Goslett, CEO and regional director of RE/MAX of Southern Africa, says that Standard Bank’s home loan restructuring is a definite win for homeowners.

“The bank has given itself an edge over its competitors with this move. It is therefore likely that other financial institutions will either have to follow Standard Bank’s example or create innovations of their own in order to compete,” he says.

Van der Hoven adds that they believe that home ownership is vital to wealth creation and they want to be part of that journey. Standard Bank cannot speak for its competitors, but we do believe this strongly encourages home ownership.

Having a home is one thing, protecting it is another, to apply for home insurance, click here.