Home loan gloves come off

In the face of increasing competition and a slowing property market, the major mortgage lenders in SA are having to rethink a longstanding "gentlemen's agreement" to discourage bond switching and the poaching of existing home loan clients from one another.

And this is creating an opportunity for borrowers to collectively save millions of rands in home loan interest payments, says Ian Wason, CEO of independent mortgage brokerage Bond Busters.

Bond switching – or mortgage refinancing – is the practice of moving a home loan from one lender to another in order to take advantage of a better interest rate. But although the potential savings are huge, the practice is still in its infancy in South Africa, thanks to the fact that until recently, there has been very little to differentiate one lender's mortgage product offerings from another's.

In the UK, about half of all the new home loans granted each year are switches, and the latest statistics indicate that up to 74 percent of all new loans being granted in the US are "refi's". By contrast, industry experts believe that switching accounts for less than 10 percent of the new mortgage advances in SA every year.

However, says Wason, this is all about to change. "The margins on banking and especially mortgage lending in SA – which are about three times those made by UK lenders, for example – are encouraging many new players to enter the local banking market. In fact, we expect the number of lenders in SA to grow from 10 currently to as many as 40 over the next five years.

"And the more these new entrants target existing borrowers, the more the big banks find that the understanding they had to discourage switching among themselves is just not working for them. They have already become much more competitive on their rates and product offerings and although they don't acknowledge it openly to each other, they are definitely not turning away switch business."

Fuelling the trend is the fact that there are fewer first-time borrowers around as the market slows down, and the simultaneous entry into the market of brokerages such as Bond Busters – which specialises in switching and is encouraging and assisting borrowers to view mortgages as a stand-alone commodity rather than a service that comes with your bank account.

"In the UK," Wason observes, "there is no correlation between your bank and your mortgage lender; borrowers go to the lender offering them the best deal. And there is really fierce competition for their business among more than 200 mortgage lenders offering about 3000 different types of mortgage products.

"Things have obviously not reached this stage in SA yet, but the industry is starting to mature and there are significant savings to be made.

"A borrower who can reduce the interest rate on a R500 000 loan from prime less 1 percent to prime less 2 percent, for example, stands to save R222 000 over the term of the loan – or virtually half the original value of the mortgage."

Wason cautions, though, that borrowers keen to refinance should be careful to work with mortgage brokers that are truly independent of any possible influence by estate agents, banks or attorneys. – Meg Wilson