Use increased equity to lower the cost of your home

The unexpected surge in homebuying and the resulting sharp rise in home prices over the past two years could open the way to lower home loan repayments for longer-term homeowners.

That's the word from Gerhard Kotzé, MD of the RealNet estate agency group, who explains that when home values increase, the equity that owners have in their properties generally also rises, and creates the opportunity for them to negotiate lower interest rates on their home loans.

"This would work particularly in favour of homeowners who took out a loan a few years ago for 100% of the purchase price, or perhaps even more in order to cover transaction costs, but whose properties have in the meanwhile increased in value and who have also reduced the capital portion of their original loan." 

For example, he says, homeowners who bought a property R1m with a 100% loan three years ago would have had zero equity in their property, and their bank would probably not have considered a preferential interest rate on their home loan. In fact, they would have been fortunate if the loan was granted at the prime rate (which was 10% at the time). 

"But now, given the swift rise in prices post-pandemic, the value of that home is likely to have increased by at least 10%, and probably more, to give the owners considerable equity, in addition to any they have gained by making their monthly bond repayments over the past three years and reducing the original amount borrowed."

And for the bank which approved the original loan, Kotzé notes, this translates to a lower loan-to-value ratio - and less risk - so that it may well be prepared to negotiate a rate concession now that could mean considerable savings for the homeowners, especially when calculated over the remaining life of their bond.

"The bank will probably not automatically make the offer of a discounted rate of interest and homeowners who apply will still need to have good credit records. They may also have to pay to have their property reassessed to establish its new value."

However, he says, it is worth the effort considering the savings they stand to make. "With the prime rate currently at 9%, they are already paying less per month than they were three years ago. However, a rate concession of even 0,25% would immediately shave R40 000 off the total cost of their home over the remaining life of their bond and still lower their monthly bond instalment. Alternatively, if they decided to maintain their monthly repayment at the non-discounted level, they would reduce the total cost of their home by some R64 000.

"Either way it would be a win for those homeowners - and certainly preferable to borrowing against the increased value of their home to buy non-durable goods such as a vehicle or furniture that would only depreciate in value."