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Is it worth keeping a home loan open?

If your home loan is paid up or even in credit, you may still be liable for a monthly service fee. The fee will be determined by when you entered into your home loan agreement or last amended it.

If your home loan agreement was entered into before the National Credit Act (NCA) came into effect, and no material changes have been made to your original agreement, the Usury Act maximum monthly fee of R5 (before VAT) applies. If it was after June 1, 2007, or if your original agreement was amended after the introduction of the NCA, you can be charged up to R50 (before VAT) a month.

First National Bank (FNB) client Mr BC complained to the bank that he is being charged a monthly service fee of R5.70 on a home loan account that has been in credit for the past 10 years.

Praven Subbramoney, head of product and marketing at FNB, says the bank is within its rights to charge a monthly administration or service fee on all its accounts.

"There is no mention in our documents, or in the regulations, of a rule to suspend fees when accounts are paid up or [in] any other instances. While we may have waived the fee in the past, we have re-evaluated our situation due to the economics of the product and, unfortunately, can no longer afford to do so," Subbramoney says.

The only way you can get out of paying the monthly service fee is by cancelling your mortgage bond, which will cost you about R2 500.

Subbramoney says many customers don't know that there's a cost to cancelling a mortgage bond. "This cost is paid [by the client] to an attorney to cancel the bond at the Deeds Office when the bond has been settled."

As soon as a bond reaches maturity (that is, when the full term of the loan period is reached), it has to be cancelled - and this service comes at a cost.

All the banks have their own "panels" of conveyancing attorneys to whom they give work.
Subbramoney says FNB Home Loans has negotiated with its panel of attorneys to discount bond cancellation fees to R1 400 for FNB clients. This includes the Deeds Office cancellation levy of R80.

Although it may cost you to keep a home loan account open - and you don't earn interest on a positive balance in a paid-up home loan account - the benefits of keeping your account open are that you have access to relatively cheap credit (in case of emergency) and you save yourself the cost of registering a new mortgage bond should you want access to a loan again.

Subbramoney says if you want to earn interest on a positive balance, you should open an investment or savings account. Clients are not encouraged to leave positive balances in their mortgage accounts "due to past experience with fraud and money laundering on these accounts", he says.

Clients at Absa and Nedbank are not charged a monthly service fee on home loans that have been paid up, but conditions apply.

At Absa, provided your account does not have a positive balance, you won't be charged a monthly service fee, Arrie Rautenbach, head of retail markets at Absa, says.

At Nedbank, you need to ask for your home loan account to be made "dormant", Charles de Winnaar, the bank's acting head of sales and customer management, says.

A monthly service fee will be charged where a home loan account has a zero or positive balance and the client has not asked for the account to be made dormant, De Winnaar says.

Like FNB, Standard Bank levies a monthly service fee on home loans that have been settled, because such accounts are still "active", Steven Barker, head of home loans at Standard Bank, says.

Barker defines "active" home loan accounts as those that are kept open for homeowners' insurance and customer convenience.

Even when the account reflects a nil balance, the bank is required by law to provide annual statements and notifications of rate changes, and must cover the cost of keeping the title deed. All these costs must be recovered, Barker says.

The "true cost" of running a mortgage bond is, on average, more than R100 a month, FNB's Subbramoney says. He says the bank incurs costs for managing home loans in the following ways:

  • Capital costs: banks must keep capital to cover any available balances. This means the bank incurs a cost for any prepaid funds or credit that is available to you.
  • Monitoring for fraud and money laundering.
  • Monitoring of credit management and account conduct.
  • Collecting debt from customers who don't pay.
  • Ensuring safe custody of the bond and deed documentation.
  • Day-to-day customer services and correspondence.
  • Computer system and staff.

Similarly, the initiation fees on home loans don't cover the actual cost of bond origination, Subbramoney says.

"The actual origination cost to the bank is in the region of three times the fee recovered," he says.

The NCA restricts money lenders to an initiation fee of no more than R5 700 (R5 000 plus VAT).
Subbramoney says the advent of Basel III (a global regulatory standard on bank capital ade-quacy and market liquidity risk) will add to liquidity charges, affecting the interest part of the mortgage business.

"The reality is that if the banks don't find a healthy balance on the mortgage portfolio that is economically viable, they may need to rethink mortgage lending in totality," he says.

If you have a home loan of less than R500 000 that was in force before June 1, 2007, when the National Credit Act (NCA) became fully effective, you should be paying no more than R5 a month to your bank or credit provider in administration or service charges.

The Usury Act, which governed home loans before the NCA became effective, set a cap of R5 (excluding VAT) for monthly service fees on home loans of R500 000 or less.

The Act was repealed and replaced by the NCA, which provides for a maximum monthly service fee of R50 (excluding VAT) on home loans.

However, a credit provider is not entitled to charge an administration fee in excess of the maximum set under the Usury Act on home loans granted before the NCA replaced the Usury Act.

This is in terms of a judgment handed down by the Supreme Court of Appeal at the end of last month, in the matter between the National Credit Regulator (NCR) and Standard Bank.

Standard Bank contended that the limit imposed on administration fees under the Usury Act did not "survive the transition to the NCA" as far as pre-existing home loans were concerned.

The regulator disputed this, and the Supreme Court of Appeal ruled in its favour, declaring that Standard Bank "is not entitled to charge an administration fee on housing loans that existed at the time the NCA came into operation in excess of the fee provided for in ... the Usury Act unless and until that fee is amended under the NCA".

If you took out a home loan before June 1, 2007, check your bank statements to ensure you haven't been overcharged for administration. If you find that you have, you can take it up with your bank or the NCR.

Steven Barker, head of home loans at Standard Bank, says all affected customers will have their monthly service fees amended back to R5 (before VAT) from January 1, 2013. Charges in excess of the Usury Act maximum will be fully refunded.

(IOLProperty)



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