Termination of bonds

Although the public’s knowledge of how to obtain a mortgage bond and how to comply with the National Credit Act has increased markedly, two questions about the termination of bonds crop up regularly, says Rob Lawrence, National Manager of Rawson Finance.

The first of these relates to the penalties charged by banks for the early cancellation of a bond when the property that is the underlying security, is sold.

All banks, says Lawrence, are entitled to and usually do charge three months penalty interest on the outstanding bond balance when the bond is cancelled before the term expires. However, this can be avoided if the owner gives the bank three months notice in writing of his intention to cancel the bond.

“As soon as the house is put up for sale,” says Lawrence, “the seller should advise his bank of his intention to cancel. As most homes take at least one month to sell and as the transfer period is usually two months, this will usually give the seller sufficient time to comply with the bank’s three month notice requirement and the penalty therefore falls away.”

Should a sale go very quickly, it is sometimes possible, says Lawrence, to delay transfer until the three months has expired. This arrangement can be made attractive to the buyer if he is offered beneficial occupation at a rate well below what he would be paying monthly on the bond.

The second question he is frequently asked, says Lawrence, is whether the bond should be kept open after it has been paid off.

“Provided there is an ‘access’ facility, our advice is almost invariably to keep the bond alive,” he says. “The reason is that this enables the bondholder to access a relatively cheap form of emergency finance again as and when he needs it.”

The banks, says Lawrence, will charge an administrative fee for keeping the bond open but this is not expensive and should, in his view, be seen as an ‘insurance’ for times when cheap extra cash may be needed.

“It always pays to access finance through the bond rather than through a personal loan or an overdraft as the interest rate will be lower and the payback period far longer,” says Lawrence.

“In addition, often the homeowners’ comprehensive insurance is debited off the bond , so this is a good way to keep this benefit conveniently alive and ensure the property remains insured.”

Article by: www.rawson.co.za