Mortgage bonds – friend or foe?

What is a mortgage bond?

It is the means whereby a financial institution (bondholder) lends you funds for the purchase of your property against the security of that property. Usually, the buyer puts down a deposit and the bondholder covers the balance, which could include the legal costs of transferring the property. A deposit is not compulsory for the loan to be granted but the financial institution could insist on a deposit.

Advantages of a mortgage bond

Obviously, most people do not have the funds available to purchase a property and thus require a mortgage bond. For those who can afford to pay cash for a property, a bond may still be desirable as they may be entitled to access the funds available in a bond for other purposes such as improving the property. Accessing the available funds in your bond should however never be undertaken lightly as severe financial hardship could result.

Applying for the bond

Be honest in your application. Remember the institution will check your credit status and payment profile. There are very stringent requirements for financial institutions to not financially overextend you. This was legislated in the consumer’s best interests, but should it be found that you misled the bondholder you will lose the legal protection and if you default, probably your property too. The financial institution will, among other things, require a signed agreement of sale, proof of identification, proof of earnings and bank statements.

Valuing the security

The financial institution will insist on valuing the property prior to agreeing to the loan as it requires the value of the property to cover the amount owing to them. Should their valuation be lower than the purchase price, you could put down a larger deposit to make up the difference.

Shopping for the best deal

Seek a bond with the most favourable interest that you can. Like any other purchase, it is a good idea to shop around. Remember it is always open to negotiation, particularly if you have a good credit rating. The worst that can happen is that the institutions refuse your request for a lower interest rate.

Forward planning is essential

As usual, it is vitally important to do your sums. Don’t develop an overly tight living budget. Consider the fact that you might be made redundant at work and always have separate funds available for this possibility to tide you over a bad period. Also remember that interest rates will in all likelihood increase over the life of your bond and you should make contingency plans for this.

Repayment hiccups

It is a good idea to keep the bondholder advised and updated should you run into repayment difficulties. They will usually work with you to find a temporary solution. Often people who run into repayment problems do not communicate with the institution, hoping in vain that the problem will go away. This is a sure way to lose the property as the matter will be handed over to collection agents who will not be very interested in arranging a temporary solution.

Length of a bond

The repayment term of a bond can be negotiated depending on your finances. Bonds are usually granted over a 20 year period but this can be reduced or increased by agreement. The longer a bond runs the more expensive it becomes due to the interest payable. Alternatively, you could settle your bond earlier. In this regard, check to see if the bond agreement has a penalty clause for early settlement. If so, you may, prior to signing and by agreement, request the penalty clause be removed from the agreement. Many people deposit any extra monies they can afford into their bond account as this could save them a large amount of money over time.

Mortgage bond insurance

The bondholder could insist or encourage you to take out mortgage protection to cover the death or disability of the major bread winner. This is a very practical solution to protecting your home and your family, as the insurance will settle your outstanding loan should you die or become disabled prior to settling the bond. The bond holder will also insist that insurance is in place to cover the loss or destruction of the property (which is their security) prior to settlement.

Saving yourself time and aggravation

If it is possible, one should attempt to prequalify for a bond, prior to seeking your perfect property. This will still require final approval based on the financial institution’s valuation of the property and a signed purchase agreement. It will indicate to you what amount the financial institutions consider you good for and in what price range you should be looking. This could potentially save you time and stress and could ensure that another buyer doesn’t whip your dream home from under your nose.