Bond cancellation penalties

Private Property South Africa
Rawson

A high percentage of home owners with mortgage bonds on their properties are not aware that when they sell these same properties, they have to give the banks three months’ notice of their intention to cancel their bonds.

If they give less than three months’ notice they will almost certainly have to pay a penalty, which can be as much as a full three months of bond repayments.

Tony Clarke, Managing Director of the Rawson Property Group, says that this arrangement, which is common to almost all major banks, has time and again resulted in reliable bond payers having to add a substantial amount to what they have already paid, for the right to merely cancel their bonds.

“This,” he said, “is one aspect of bond loan conditions that I have never understood or have been able to see the justification for. The banks claim that they need up to three months to process the documentation and figures on a cancellation and to reinvest the money paid back to them in the best way possible. I suspect, however, that such documentation can probably be completed in less than an hour and, as the banks are investing large sums of money every day, it cannot require that much extra time to reinvest a repaid bond.”

In some case, said Clarke, the bank will offer to waive the penalty clause, provided the bond holder takes out a new bond on his new property – at today’s tougher prime plus interest rates – i.e. at anything from 0,5% to 5% above prime.

“Many commentators have said that the entire system is slanted in favour of giving the banks extra, unearned income,” said Clarke, “and I am inclined to agree with them.”

Asked what he recommends to bond holders to avoid this predicament, Clarke said that they should give notice of their intention to cancel a bond as soon as their house is put onto the market. If it is then not sold within three months, he said, the notice period can be renewed and extended.

“If you are buying now,” said Clarke, “it is also worth trying to change the three month cancellation clause into a one month clause. Many banks, however, will reject this, but it is definitely worth a try.”

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