You may be in for a nasty surprise if you try make changes to your home loan facility

Beware, if you make any kind of change or addition to your home loan, banks will now apply new credit rates that could be higher than what you’ve paid previously.

According to Gary Palmer, founder and CEO of Paragon Lending Solutions, this isn’t limited to withdrawing extra funds. Any change in suretyship, withdrawal of a share portfolio as security, or even the addition of extra security to the facility could trigger new rates.

And with current lending rates close to prime (versus prime minus 2% around 3 years ago), this could come as a nasty surprise to consumers, investors and entrepreneurs who are accessing capital from their home loans, Palmer warned.

He said that many investors and small business owners are being caught unawares when trying to access additional capital through their homeloans. “Not only is the age of the access bond over, but they may trigger changes which result in new, unattractive rates from their bank.”

Palmer pointed out that many South African entrepreneurs previously relied on their access bonds to fund new ventures, new investment properties and, sometimes, as short-term operational capital when cash flow was tight.

Post-2008, central banks reigned in lenders and both the National Credit Act and Basel III put a serious crimp on banks’ ability to offer these open ended loans.

Basel III requires banks to meet two key ratios: the liquidity coverage ratio and the net stable funding ratio.

The liquidity coverage ratio is aimed at ensuring that banks have a stock of high-quality liquid assets that can meet a 30-day cash outflow in the event of a run on a bank – as we saw internationally in 2008.

The net stable funding ratio, meanwhile, is there to ensure banks have enough long-term stable funding to protect against an extended period of stress. This is prudent and ultimately, protects the consumer against reckless lending and a potential banking crisis, Palmer said.

“What many entrepreneurs don’t know, however, is that this has all but eradicated the traditional access loans. What’s more, if any kind of change is made to existing contracts, banks will apply new credit rates.

“We still have people who think they can capitalize on their home loans for new investment opportunities. However, while their original bonds may have been at prime minus two percent around three years ago, the current lending rate sits closer to prime,” the financial expert warned.

“This is clearly very expensive money. It places an excessive risk burden on investors and should be avoided if possible.”

Further, investors should be aware that they may not even be looking for additional credit and any changes to their loan facility with the banks will still trigger new rates.

Examples of this could be a change in suretyship, withdrawal of a share portfolio as security, or even an addition to the deal that would logically seem appealing such as the addition security to the facility, Palmer said.

Read: Crucial court ruling gives SA banks greater freedom on home loans