A home loan solution from FNB, which it describes as a ‘market first’, may seem appealing for graduates and young professionals eager to own their first home, but there are more than a few potential pitfalls.
The key is understanding exactly which trade-offs you are making and how they may affect repayments over the full term of the loan.
Read: Even homeowners in default of their mortgage loans have rights, says court
The bank’s solution for under-35s (who hold an NQF Level 5 qualification or higher) includes what it describes as “valuable benefits”, including:
- No capital repayments during the first two years;
- A more tailored and competitive fixed interest rate for the initial 24 months;
- A loan of up to 110% of the property value;
- A “smooth repayment transition after two years”;
- Flexible loan terms of up to 30 years; and
- A 50% discount on bond attorney registration costs.
The first and second of these “benefits” may appear attractive, but they are far less appealing on closer inspection (more on that, shortly).
A further three of the listed benefits (with the exception of the smooth repayment transition) are available to most home loan applicants at the bank and aren’t unique to this product at all.
For example, it offers the 50% discount on all loan applications made directly through nav » Home on the FNB app.
Typically, loans at 110% of a house’s value mean you’re effectively capitalising purchase-related expenses (such as bond registration costs, property transfer costs, transfer duty and deeds office levies) and paying these off – plus interest – over the period of the home loan (generally, 20 years).
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This is also not a good idea simply because you start off underwater, in other words, owing more than the value of your property.
The capital repayment holiday looks appealing as you’ll start off paying a noticeably lower monthly amount for two years, but you’re not building any equity over this time.
On a R1.5 million home loan for a property valued at this amount, you still owe R1.5 million after 24 months. This means you only have 18 years (on a 20-year mortgage) to pay back this capital amount, resulting in a higher monthly payment given the shorter time horizon.
In this hypothetical example, using a base scenario (normal repayment at prime (currently 10.25%) + 1%, and assuming no changes in interest rates over time (rather unlikely), our homebuyer will pay back a total of R3.77 million, of which R2.27 million is interest over the 20 years.
| Base scenario | Capital repayment ‘holiday’ scenarios | |||
| Prime + 1% | Prime + 1% | Prime | Prime – 1% | |
| Repayment ‘holiday’ interest rate | N/A | 11.25% | 10.25% | 9.25% |
| Post-repayment ‘holiday’ interest rate | 11.25% | 11.25% | 11.25% | 11.25% |
| Monthly payment (years 1 and 2) | R15 739 | R14 062 | R12 813 | R11 563 |
| Monthly payment (years 3 to 20) | R15 739 | R16 224 | R16 224 | R16 224 |
| Total interest | R2 277 322 | R2 341 950 | R2 311 950 | R2 281 950 |
| Total repaid | R3 777 322 | R3 841 950 | R3 811 950 | R3 781 950 |
| Extra amount repaid vs base scenario | N/A | R64 628 | R34 628 | R4 628 |
Their monthly repayment will be around R15 700, excluding any other fees. Obviously, a situation where you’re only paying interest for the first two years will result in a lower monthly payment.
Even at the same interest rate, this will be around R14 000, a saving of R1 700. However, FNB is offering a “more tailored and competitive fixed interest rate” for that period.
Let’s assume our homebuyer is offered the prime rate (pretty competitive!). This will see their repayment drop to R12 800 over 24 months, which is nearly R3 000 lower than they would ordinarily pay.
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But, by deferring the capital owed for 24 months, they’ll end up paying an additional R35 000 in interest over the full period of the home loan.
It may be true that a R3 000 lower monthly repayment to start will aid this household’s cash flow tremendously. But will they be able to afford a nearly R3 500 jump after two years?
FNB speaks of a “smooth repayment transition,” but offers no further details.
This will likely mirror allowances that it and other banks make for struggling homeowners who may be between jobs (it is also similar to payment break schemes offered during the Covid-19 pandemic).
Read: Covid-19 payment holidays lead to rise in credit balances and delinquencies
What will likely happen is that the repayment amount will ramp up over three to six months, starting in month 25.
This will actually result in an even higher monthly repayment for the remainder of the loan, as less capital will have been repaid by month 31 than ought to have been.