ARE HOMEOWNERS PENALISED FOR EARLY SETTLEMENT OF THE MORTGAGE LOAN?

When a bonded property is sold, transfer to the new owner may only proceed once the seller has settled the mortgage loan with the bank and the bond itself is cancelled in the deeds office. Here and there one finds an instance where the seller has settled the full loan before the property is put on the market, and when the existing bond is cancelled upon transfer, no cancellation amount is payable to the bondholder.

 

However, in the majority of instances, sellers still owe money on their mortgage loans at the time of sale and part of the transfer process involves an enquiry by the seller's attorney to the seller's mortgage bank regarding the amount payable to the bank for the bond to be cancelled. It is in this context that the phrase "cancellation penalty", "penalty interest" or "90 day notice period" is used.

 

How does this work?

1. The existing loan agreement will have a provision requiring the seller to give written notification of the intention to cancel the bond. Thus the seller will notify the bank early on of the plan (to sell his house) and cancel the bond. Giving 90 days notice to the bank must not be equated to cancellation and serves only to advise the bank (or whichever financial institution granted the mortgage) of the seller's intention to sell the property. If the sale of the property is not finalised within the 90 day period, the seller must renew the notice and re-send it to the bank.

 

2. On receipt of the notice, the bank will proceed to calculate the capital and interest owing under the bond and will advise the seller's attorneys that it will consent to the cancellation of its bond if the stated amount is paid to it on transfer of the property.

 

3. Section 125 of the National Credit Act allows lenders to add an "early termination charge" to these figures and details the maximum of this additional charge. In short, the "early termination charge" is generally limited to the interest that would be payable over a three month period less the period of notice of settlement.

In some instances the requirement to give 90 days notice may be waived, for example where the seller of the property has been sequestrated; the property is transferred from out of a deceased estate; or where the seller is buying a new home and uses the same bank to finance the new purchase.

 

How does the calculation work

 

Pretend that the seller has a capital amount outstanding of R745 000 with an interest rate of 9% applicable to the loan. The seller gives the bond provider notice of your intention to cancel the bond on 2 May 20xx.

As mentioned, the bank may charge penalty interest which will be calculated as follows:

Interest on the capital amount per year R745 000 x 9% = R67 050

Interest on capital amount per day R67 050/365 days = R183.70

Daily interest on capital amount x 90 days R183.70 x 90 days = R16 533

Amount of early termination charge

 

The penalty interest period will be effective from the date on which the bank receives the notice, and the penalty amount (early termination charge) will reduce daily until transfer or the 90-day period has lapsed. Thus, for example, if the transfer is registered on 15 June 20xx, the seller will be liable for penalty interest for 44 days (counted from 2 May to 14 June), amounting to R8 082.80 (R183.70 x 44 days).