Home Loan Talk – Early Termination Interest

Private Property South Africa
Denise Simpson

Any bond holder intending to sell or cancel their home loan should take heed

of the following information.

When the home loan is granted the normal period that the client will take to

repay the bond is 20 years and the prevailing bond rate at that time will apply.

The Usury Act permits a bond holder to make payments in addition to the

stipulated monthly installment at any time.

However, should the bond holder wish to pay the full outstanding balance of the

loan in one amount prior to the due date (the bond has to be in the books of the

bank for 3 years), the following provisions will apply:

  • The bond holder is required to give the bank 90 days notice in writing

    of the date the payment will be made.

  • The notice may not be given before the expiry of a period of 90 days

    from the date when the loan was registered.

  • The act clearly stipulates that the bank has the right to have an

    account on their books for a minimum period of 180 days from inception i.e.

    90 days have to lapse after registration of the bond and then 90 days

    notice, which should be furnished to cancel the bond within the 3 year

    period.

This allows the bank to recoup some of their origination costs as a result of

the potential interest income that will be lost. It takes anything up to 3 years

before a loan becomes profitable to the bank.

The early termination fee is not a penalty imposed by the bank, but a recovery

of interest income, which is specifically provided for in legislation.

Accounts to which early termination would apply:

  • When a bond is cancelled within the first 3 years after registration

    with effect from 1 October 2001.

  • All home loans with a fixed or capped interest rate agreement.

Accounts to which early termination would NOT apply:

  • Bonds registered prior to 1 October 2001 with a variable interest rate.

  • Accounts where the client has given 90 days notice.

Notice is deemed given when either an attorney requests cancellation figures

or if a client writes to the bank and gives notice that they wish to cancel the

bond.

Process to determine finance charges debited to your home loan account:

  • 90 Days interest is calculated on the outstanding balance at day of

    notice.

  • The provisional figure is added to the outstanding balance together with

    other allowances such as insurance/assurance and admin fees, etc.

  • On final cancellation, the unexpired portion of 90 days interest will be

    charged and debited to the bond account, and will be due by the bond holder.

Refund of early termination interest charged:

  • Should the customer take out a new bond with the bank within 6 months of

    settling the previous home loan account, the client needs to advise the

    cancellation department of the new account number.

  • The refund will not be considered until the new bond is registered.

To avoid early termination - give 90 days notice!

This information may be valuable to investors as they often buy off-plan and

sell on once the project is completed, which means they have not paid a single

bond repayment and penalty interest will apply. So, take heed of the above

information to avoid these costs, or make sure you factor the cost into your new

sale price.

Please note: This information may vary from bank to bank and it is recommended that you check the rules with your bond consultant.

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