If you are selling your property before your home loan has been paid in full, you will need to apply to the bank for the early cancellation of your bond.
In terms of the National Credit Act, banks are entitled to levy a penalty if you cancel your bond before the end of the agreed loan period. If you cancel your bond within a few years of buying your property, banks are permitted to levy a 1% penalty on the outstanding bond amount.
On a property with a R1 million outstanding bond, for instance, the penalty fee will be R10 000. This amount will be deducted from the funds paid into the account when the property is sold and transferred to the new owners.
As with the purchase of a property, the four parties involved in cancelling a bond are:
• The buyer
• The bank or other financial institution
• The conveyancing attorneys
• The Deeds Office.
Cancellation penalties do not apply if:
• The property sold is part of a deceased estate.
• The property is part of a sequestrated estate.
• You are buying another property and take out a new bond with the same bank.
Notice of cancellation
The first step in the process is to submit a notice of cancellation to the bank. Most banks in South Africa require written notice of your intent to cancel your home loan 90 days before the cancellation takes place. If you fail to request the cancellation or do so less than 90 days before the cancellation takes place, you will incur penalties.
It is also best to submit your bond cancellation notice before putting your property on the market. The cancellation notice is usually valid for six months, so if the property remains unsold after this period, you need to resubmit the cancellation notice to have the notice period extended.
Step two is to instruct your conveyancing attorney to request your cancellation – or settlement - figures from the bank. These are calculated including the following:
• The outstanding balance on the date the cancellation figures are issued.
• Interest due on your account during the estimated period before transfer takes place.
• Service fees, which include any premiums for homeowners insurance or homeowners comprehensive insurance cover.
If you haven’t submitted a cancellation notice, the bank will consider the 90-days period to begin from the date that the cancellation figures are first requested.
New cancellation figures must be requested by the attorneys every three months.
The settlement figure is based on your continuing to make normal repayments on the home loan during the cancellation process. Not doing so will place the account in arrears, and the bank may take legal steps against you.
In addition to the cancellation costs due to the bank, the conveyancing attorney will charge a fee for the cancellation which occurs in the Deeds Office, as well as a fee for administering the cancellation of the bond. These fees are payable directly to the attorney.
Once the bond is cancelled, the attorneys will pay the bank in accordance with the settlement figures. This amount will be credited to your home loan account. Any surplus funds will be refunded to you and the home loan account will be closed.
Minimise the cost of cancelling
It’s important to note that the bond is only cancelled once your property is sold. The fact that you have asked the bank to cancel your bond doesn’t mean it will automatically be cancelled 90 days after you have submitted the notice of cancellation.
If the bond is cancelled after the 90 days period, no early termination fee will be applicable. However, if the bond is cancelled before the 90 days period, a pro-rata early termination fee is applicable, calculated on the remaining days in the 90-day period.
To avoid incurring these additional costs it is advisable to request that transfer of the property should only take place once the 90-days bond cancellation period has ended.
Knowing and following the steps in the process will keep bond cancellation costs to a minimum.