Contracts are for most people very daunting, confusing and actually downright scary. In truth, most of the people who draft them don’t often understand what they mean. Loan agreements are very onerous and getting approved for financing even more onerous. Most people are therefore just happy to be approved and eager to sign on the dotted line and as a result, enter into contracts without truly understanding the terms and the implications of such contracts – I mean what could be so difficult, the bank gives me money and I must pay back the money. What happens though when you don’t pay back the money? There are long lasting implications which will affect you for years after the fact including ‘stains’ on your credit record resulting in you being unable to obtain credit in future or making interest provided on loans extremely expensive.
Home loans are the longest loan arrangements that people enter into with banks. It is therefore imperative that people understand the terms in home loan agreements and what a home loan actually is, especially in a country where ‘colgate’ means any toothpaste and checkers is not just a grocery shop.
This is a loan that a bank lends to a buyer to purchase a home. The bank pays the lump sum required to purchase the home to the seller on behalf of the buyer. The buyer than has an obligation to repay the loan (plus interest) over a period of time to the bank, generally between 20 – 30 years. We often refer to this as a mortgage bond, bond or mortgage interchangeably. Technically these are two separate instruments.
Often referred to as a bond or mortgage this is a form of ‘real security that is registered over a property bought with a home loan. It provides the bank with preferential security over all other creditors and allows the bank to ‘sell’ the secured asset (the property) in the event of non-payment and be the only beneficiary of the proceeds obtained from that sale. This makes the home loan more secure. Real security, when registered in the Deeds Registry creates a right that can be enforced against third parties. This means no other lender can claim to have advanced money to a person using a property with a mortgage bond with that very property being used as security.
So in truth the homeowner becomes the owner of the property and is registered as such on the title deed and s free to use the property with limited conditions over the period of the loan. Such conditions include requiring permission from the bank before making significant alterations or not being able to sell without the banks consent, this is to protect the banks interest and values of the property.
Of course, you can register multiple bonds with tiered preference but that becomes a loan to value issue and all subsequent lenders agreeing that they will rank behind the earliest lenders – a conversation for another day.
There are also many types of home loans/ mortgage bonds.
Sectional Mortgage Bond
This is mortgage bond registered as security over a unit held under a sectional title deed, including the exclusive use area attached to that unit.
A flexi or access bond is a type of bond arrangement that allows homeowners to ‘withdraw’ any extra money they have paid towards their home loan over and above their monthly repayments. The extra payments reduce the amount of the outstanding loan quicker than what is expected creating ‘extra cash’ in the homeowners account. Banks allow homeowners to access this a cash if they have selected a flexi bond as this is money paid ahead of schedule. This is particularly helpful, if a homeowner ever needs cash in a hurry. But you need to be careful as overtime you could have a home loan that seems not to reduce or is never ending depending on when a withdrawal is made and the size of the withdrawal even though this option may seem to be particularly helpful and provides access to ‘cheaper’ funding.
Step Down Bond
In terms of these types of bonds there will be periodic decrease in the interest rate. This will happen even when the home loan interest rate rises or falls in respect of variable interest rate loans.
Transfer Duty is a tax payable to SARS by a purchaser of property on the value of any property exceeding R1 000 000. It is calculated on a sliding scale as a percentage of the purchase price and is payable on registration of the property into the name of the purchaser or within 6 months of purchasing the property.
Transfer costs are often referred to along and including transfer duty. However strictly speaking these are actually the conveyancing costs paid to a conveyancing attorney for completing the actual transfer of ownership of a property in the Deeds Registry from the name of the seller into the name of the purchaser. Even though the transferring attorney is appointed by the seller, the costs are paid by the purchaser. These costs are also calculated on a sliding scale based on the purchase price.
Bond Registration Costs
These are the costs paid to the conveyancer (also known as the bond registration attorney) registering the mortgage bond over the property in favour of the bank. The costs are also for the purchasers account and are calculated on a sliding scale based on the purchase price.
It’s all a lot to take in at once. perhaps let’s leave it here for now and we’ll pick it up next time with other terms to look out for and understand.
*Disclaimer: The contents of this article should not be considered as legal, professional, financial or any other form of advice. These are merely views based on the writer’s personal experience. Readers should obtain independent advice on any matter prior to making any decision.