Because home loans and mortgage bonds play such an important part in your work as a Property Practitioner, you need to understand what they are and how they work.
- A mortgage bond is a LEGAL DOCUMENT in which:
- The LENDER (e.g., the financial institution) agrees to lend the BORROWER (your purchaser) money to buy the property, and
- The BORROWER pledges the property as security for the loan. Should they default on repaying the loan, the lender can repossess the property and sell it to recover its money
If the applicant does not qualify in terms of their income-earning capacity, they may provide someone (usually a close relative) to stand SURETY for their loan. The financial institution will ADD the surety’s income to the purchaser’s income when qualifying them.
- Why is a Mortgage Bond Registered?
A bond is registered with the Title Deed in the Deeds Office for the following reasons:
– To make its existence public knowledge.
– To prevent the mortgagor (purchaser) from transferring the property to someone else without settling their debt to the mortgagee (bank).
– To protect the mortgagee in the event that the mortgagor becomes insolvent; if that happens, the mortgagee normally has the first claim against the proceeds of the insolvent estate when it is wound up.
– To protect the mortgagee in the event that the mortgagor defaults on repaying the loan; they can repossess the property and sell it to recover their money.
- More than One Mortgage Bond
There is no limit to the number of bonds that may be registered with the same property as security. It often happens, for instance, that a purchaser takes out a bond to finance the purchase of the property and later—maybe several years later—takes out a second bond to finance alterations to the property. They need not be with the same bank. If the mortgagor becomes insolvent, the mortgagee on the first bond has the first claim on the estate. Normal bond registration costs must be paid for each additional bond.
- The Mortgage Bond
A lender (bank, etc.) lends money to the purchaser of immovable property, who registers a mortgage bond over their immovable property in favour of the lender. The borrower grants the bond (mortgagor) and the lender holds the bond (mortgagee). The property mortgaged is usually the purchased property, but it can be another property owned by the purchaser.
- The Mortgagee’s (Lender’s) Right
The bondholder is entitled to have the mortgaged property sold in execution if the mortgagor fails to fulfil their payment obligations.
A Court Order must be obtained unless the debtor consents to the sale in writing.
The bondholder has a preferential claim to the proceeds of the sale if it is sold subsequent to insolvency. Only if any proceeds remain after the bondholder’s claim will the other concurrent creditors receive payment.
The bondholder does not own the property—the purchaser does.
- The Mortgage Loan
The amount of a mortgage loan usually constitutes a percentage of the value of the property (as determined by the bank’s valuer). They will take the purchase price by a bona fide seller into account.
A Property may never be a party to increasing (fraudulently) the purchase price on the contract of sale in order to enable the purchaser to obtain a larger loan.
There is no limit on the number of bonds that can be registered over a property. The first bondholder has a preferential claim (first in time, first in rights) if the property is sold in execution.
If there is a shortfall in the purchase price, the seller may be willing to grant the purchaser a loan for the outstanding amount against the registration of a second bond over the property (called a ‘kustingsbrief’). A “second bond” clause in an agreement of sale must be carefully worded.
A property cannot be transferred to a purchaser unless the existing mortgage debt has been paid in full and the bond is cancelled.
A purchaser can “take over” the seller’s bond, but this requires the written consent of the bondholder (not common practice).
- The Practical Implications of a Mortgage Bond
The offer to purchase must be made subject to the condition that a mortgage loan is approved by a certain date.
The purchaser must apply for the loan as soon as their offer has been accepted. Once the loan has been approved, the contract becomes binding. The seller receives the full purchase price on the date of transfer.
Simultaneously with the transfer, a mortgage bond is registered in favour of the bank, and the amount is paid to the purchaser and by the purchaser to the seller. The conveyancer ensures that bank guarantees are issued prior to registration of transfer. The purchaser will probably have to pay the financial institution an inspection fee as well as bond registration expenses. Bond registration costs have to be paid to the conveyancer attending to the registration of the bond (fixed tariff).
- Mortgage Bond Clauses
The mortgage bond clause usually takes the form of a suspensive condition. The amount of the loan and the approval date must be added.
- Other Costs
If a buyer makes use of bond financing, the attorney will charge a bond registration fee. This figure is based on the bond amount and is subject to VAT. The bank that grants the loan will also charge a valuation fee, which is also subject to VAT.
- Securities
– General
– If a property transaction is not done on a cash basis, the buyer will have to borrow money and offer security to the creditor.
– Security is required to ensure the repayment of the debt.
– The two main types of security are personal and real security.
– Personal Security
– Someone binds themselves personally to the creditor for the repayment of the borrower’s debt.
– The most common form of this is a surety. A surety agreement must be in writing and signed.
– The agreement must contain the identities of the creditor and the surety, the debtor, the nature of the debtor’s obligations, and the extent of their liability.
– If the debtor does not pay their debt, the creditor can claim from the surety. The creditor must first claim from the debtor.
– Should a surety bind themselves as ‘surety and co-principal debtor’, the creditor can claim directly from the surety without first claiming from the debtor (the surety then has a right of recovery against the debtor).
– A spouse married in community of property cannot bind themselves as surety unless the other spouse has given written consent, which has been signed by two witnesses.
– Real Security
- Real security is a limited real right which a creditor has over the property of another to secure the repayment of the debt.
- This right is established by means of an agreement (pledge, mortgage bond) or tacitly by the operation of law (tacit hypothec, e.g., a builder’s lien).
– On insolvency, the tacit hypothec ranks directly after the first bondholder.
– Pledge
– A pledge is a right a creditor has over the movable property of another to secure repayment of the debt.
– It can be in the form of pawning an article or pledging shares or insurance policies.
– On non-payment, the pledged property is sold to settle the debt.
– The creditor must return the pledged property when the pledge is extinguished.
- Notarial Bonds (Not for Property Transactions)
A notarial bond is a bond registered over the movable property of a debtor. The property does not have to be delivered to the bondholder. Notarial bonds are used mainly for the financing of farms and industrial properties (farming equipment, machinery, etc.).
