Interim interest payments during building may be deducted from loan

Rawson Properties franchises serving Johannesburg are currently marketing over 3 000 residential units in various developments. This is going well, but they are finding that those buying into plot and plan schemes quite often do not understand the interim interest payment arrangement, says Sean McCauley, Rawson’s regional director for the northern territories of South Africa – and this can result in cash shortages as the developers near completion of the buyer’s home.

“When a buyer is awarded a building loan,” said McCauley, “he will start paying interim interest as soon as money is drawn down from the loan, which is normally upon transfer of the land into the buyer’s name. The buyer then pays the interest on the land cost from the date of registration until competition of the house. During construction the developer will also draw down sums to pay for work on various sections of the house as they are completed – these are known as progress payments, and they obviously increase the interim-interest payments.

“On a R2 million deal, for example, the buyer may have to pay interest immediately, say, on R500 000 for the land and thereafter on a pro-rata basis on the R1,5 million progress payments used to fund the building as it goes up.”

Many bondholders do not realise, said McCauley, that the banks will either deduct these interest payments from the total amount pledged for the loan or request the interest to be serviced monthly during the construction.

This, he said, may mean that the bondholder, who thinks that the sum borrowed will cover the entire amount owed to the developer may find that by the time the final proceeds have been drawn from the loan no funds are available to cover the outstanding amounts still owed. Some owners have even assumed that the developers progress payments will include the interest payments.

“It is essential to clarify this matter at the outset,” said McCauley, “because many people simply do not have the extra cash required in these situations. Furthermore, the developers contract agreement should state exactly who is liable for the interim interest payments – the developer or the purchaser, i.e. is the contract price inclusive of interim interest or not.

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