Second Bonds can provide a solution to today's bondholders

It now looks as if the major banks will continue to keep tight purse strings on bond loans no matter how much the interest rates fall, says Lanice Steward, MD of Anne Porter Knight Frank. Whereas previously it was possible to get a 110% bond, today Absa (and other) banks are asking for a 30% deposit. With transfer and other costs, this means that a borrower looking for a R1 million bond would have to find R400 000 upfront.

“The current situation,” she said, “is not unlike that of the 1980s and I believe we can learn much from that time.”

In the 1980s crunch period, said Steward, many bond applicants secured their loans by arranging back-to-back investments in support of their bonds.

“This is still possible but a different approach could be to register a second bond,” said Steward. “Among our clients experiencing difficulties getting bonds for the required amount, we often find that they have family members who are in a position to raise a second bond on the property. Being a legal document, the second bond offers adequate protection to the lender.”

The system, said Steward, creates a win-win situation for all because the lender will get a better return on his bond than if he put the cash in the money market. In addition, he can, if so inclined, charge the borrower a lower rate of interest and still make a useful profit himself.

Should the borrower default on his payments the second bondholder will still have the house as security, bearing in mind, however, that the bank (the issuer of the first bond) will have the first claim on any sums raised by the sale of the property.

Anyone proposing to help a friend or relative in this way, said Steward, should take care to see that he is not overpaying for his property. There have, she said, been cases where repossessed properties sold at prices substantially below what was paid, leaving the bondholders with money to pay in, not with a profit.

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