Home Loan Jargon: Bridging Finance, Suretyship, Switching.

Bridging Finance

Bridging Finance allows purchasers or sellers to have access to cash before the registration and transfer process has been completed. The seller is able to use the funds to pay outstanding rates and taxes, for example. The purchaser can use the funds to pay the transfer fees so that the transfer process is not delayed.

Bridging finance can be a useful tool to help you out of a ‘catch-22’ situation, like having to wait for the profit of the sale of your house to pay for the registration and transfer costs of your new home.

VERY IMPORTANT: Make sure you understand all the costs involved when using this type of short term lending. Find out if there are administration costs, what interest will be levied, and so on because this type of financing can be expensive.

Most institutions that provide bridging finance will only finance up to 80% of the surplus money which you will receive from the sale of your property.

Suretyship

It may happen that your monthly income and total net asset value does not meet the financial institution’s requirements in order for that institution to provide you with the full amount of the loan that you have applied for. In such an instance, the bank may ask you to get someone to stand as guarantor for your loan. This means that if you do not repay the debt, that the surety becomes personally liable to do so.

There are two types of suretyship which will define how much of the debt will be guaranteed by the surety, namely a limited suretyship which means that the surety is responsible up to a certain rand value and an unlimited suretyship which means that the surety has unlimited liability to the creditor. If you are the person signing surety for someone else, make sure that you read the agreement carefully and that you are prepared to pay the debt if this person does not.

A word of caution: Try to avoid signing surety for anyone including family, friends, business partners and definitely not your boyfriend or girlfriend.

If you have signed surety for someone and their financial position changes for the better it is always advisable to ask the bank if they would consider cancelling the suretyship.

Tips, if you are looking at standing as guarantor for someone’s loan:

• Make sure you understand the ramifications of standing surety for someone’s debt;
• Make sure you know how much of the debt you will be asked to pay (limited or unlimited);
• Limit your surety to ‘a particular debt’ and not to ‘the person’ as you may find yourself paying for that persons other debt taken out years later;
• It is advisable to limit your suretyship to a specific amount.

Security is something of value to the creditor which can be converted to cash in order to recoup the debt. An example of this is when you cede a policy, which has a surrender value (the cash value on it).

Switching

What is this ‘buzz word’ and why do it?

The South African property market has become extremely competitive as the financial institutions fight for market share. So, you, as the consumer can benefit from this. Switching simply means moving your home loan from one financial institution to another.

Why would you do it? Well the answer is simple: To get a better interest rate on your home loan. A reduction of merely 0.5% on your interest rate could save you thousands of Rands in the long run. Another reason to switch is that not only has another financial institution given you a better rate but they may have also offered you additional lending against your property.

The Costs of Switching.

The two points mentioned above make it look very attractive to move your home loan, but you must be mindful of certain costs involved. Your current financial institution, more than likely, has penalty clauses written into your initial home loan agreement, which means you may end up paying 90 days’ penalty interest on your home loan if you cancel your existing home loan with that institution, which could be quite a hefty amount. Who is going to pay the attorneys fees and other registration costs to register your new home loan and what about the bond cancellation costs of your existing home loan? There are also valuation fees and initial administrative fees to be paid on the registration of a new bond!

With all this in mind it could still be a worth while exercise to move your bond however. Due to the competitive nature of the market some financial institutions are prepared to waive valuation and administrative fees as well as pay for (or a portion of) the registration and cancellation costs involved.

How do you get around the 90 days penalty fee? It is advisable to contact your financial institution to discuss this. Most financial institutions accept a 90 days notice period of your intention to cancel your home loan.

Necessary Documentation:

If you decide to switch your home loan you will need to provide the new financial institution with copies of your pay slip, bank statements, IDs and all the necessary documents required to prove affordability.

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