Payroll deductions for paying off home loans
Debit transactions can be costly, but a customer who makes use of a payroll deduction to pay for their home loan will enjoy benefits, besides just saving on banking fees, said First National Bank (FNB).
These benefits include a better risk profile with the bank, less chance of defaulting, as well as additional advantages such as a better credit rating with the bureaus.
A payroll deduction means that a customer’s home loan instalment or premium will come out of their salary and be paid directly by the employer to the service provider on behalf of their employee, explained FNB.
The remaining balance of the salary – after the home loan payment, UIF, and if the company offers medical aid, and a retirement fund - is then paid over to the employee.
Lee Mhlongo, CEO of FNB Housing Finance said that approximately 30% of the FNB affordable housing book comes from payroll deductions.
“We would encourage customers to go down this route, if their company offers this as a solution,” said Mhlongo.
FNB highlighted the fact that they do not have any problems with customers defaulting on their loans.
“The percentage of FNB’s home loans that are non-performing, at 2.9%, versus 4.4% for the industry, demonstrates that its superior levels of growth has not come at the expense of credit quality,” said the bank.
Lower interest rates
“There are many benefits from arranging a payroll deduction to service a home loan,” said Lee Mhlongo, CEO of FNB Housing Finance.
Mhlongo highlighted that the major benefit of entering into a payroll deduction agreement for a home loan repayment is that the customer is generally viewed as less of a risk to the bank.
Because of this, the customer can sometimes reap the benefits of lower interest rates.
How much a customer could save is entirely dependent on their risk profile, said Mhlonog, “but a 0.5% benefit, on a home loan of R450 000, is R149 a month.”
With a payroll deduction there is a reduced risk of customers not repaying their home loan on time.
“There is always the chance, with a debit order, that the customer has a shortfall when there are insufficient funds in his bank account which may result in the home loan falling to arrears, which may have credit bureau ramifications,” said Mhlongo.
Helping get more loans
Mhlongo said that the fact that the customer is making use of a payroll deduction will be taken into account when a bank reviews the home loan application, or if they want to take out another loan.
“This means that the customer stands a greater chance of being approved for a loan. And in some cases, having a payroll deduction could mean the difference between being granted a loan, or not,” said Mhlongo.
He went on to say that customers can also receive a better interest rate which directly translates into money in their back pocket at the end of the day.
Saving on banking fees
Because there is no need for a debit order, customers can save money on their banking fees. However, not every bank account attracts debit order fees. FNB said that it is dependent on the customer’s specific account.
Adding to this, a better credit profile can also be obtained, as there is no way for the customer to now miss a payment.
“Another plus for home loan customers is a better credit profile listed on the credit bureaus, because your payment behaviour will show that you are able to service debt responsibly, and this will help with lower interest rates on other credit products,” said Mhlongo.
The downfall of payroll deductions?
“It is important to note, if you have a payroll deduction in place, if there is a rate increase, you will need to have the salary deduction increased with your payroll, as this is not currently automatic,” warns Mhlongo.
If a customer moves jobs, then they need to alert their new employers to the fact that they were using payroll deductions before.
“Not all companies allow, or have the ability to service payroll deductions, which means that if a customer moves jobs they will have to speak to their home loan provider,” said Mhlongo.
However, Mhlongo highlighted that if their new job does not offer payroll deductions, it does not necessarily mean that they will lose their negotiated better interest rate.
“The fact that there was a payroll deduction previously in place, although not guaranteed, may work in their favour,” said Mhlongo.
Setting up your direct deductions
In order to set up a payroll deduction, customers are asked to call their banks for more information.
“Our customers [FNB] can phone our call centre 087 736 6000 and request a payroll deduction information pack for their employer’s human resources department. This information pack will guide the human resources department on how to activate the deduction.
“Once activated FNB will automatically detect the payment method and activate the benefits accordingly,” said Mhlongo.