Business & Economy

Monday, 01 June 2009 16:45

Mortgage Bonds: Two Parts that Constitute a Whole

{pp}Because we refer to property related loans as “mortgage bonds”, borrowers often confuse the two parts that constitute the whole transaction. One is the security given to the bank under the mortgage bond agreement and the other is the actual loan obtained. To complicate matters, they don’t have to be the same amount and it doesn’t always have to be a mortgage bond that secures the home loan.

The mortgage bond is a legal agreement whereby you, the owner of the property, hand over your rights over the property to the bank in order to secure a loan. This can be either a home loan, an overdraft or a personal loan. You can choose the amount for which you want the mortgage bond agreement to be, as long as it is higher than the loan it secures.  Furthermore, you don’t have to “qualify” for and your property doesn’t have to have the value of the amount stipulated in your mortgage bond agreement.

The problem arises when a borrower signs a mortgage bond agreement for an amount higher than the actual loan granted. This is standard practice when a client purchases vacant land with the intention of erecting a building on the property or alternatively, when a borrower wants access to the future capital growth on a property without having to incur the costs of registering another mortgage bond.

Borrowers often mistake the amount signed for under a mortgage bond agreement with the loan amount granted. In a January 2009 media report, a property owner felt “done in” by bankers who had him sign a mortgage bond for R3.4 million when he had purchased vacant land for R1.4 million with the intention of erecting a R2 million home on the property. When the he needed access to these funds, they were not available, as they were never granted to him in the first place. When he then applied for these funds, he didn’t qualify for the additional R2 million loan.

It is important for consumers to understand that whenever they choose to register a higher mortgage bond, the amount is not necessarily available to them. Should they require a further loan, they will need to apply for it and there are no guarantees that they will qualify for the loan or that the bank will find sufficient value in the property.

One should weigh the future cost saving in registering a higher bond with the associated risk. By registering a higher bond, you are giving the bank permission to claim any outstanding debt you may have at that particular bank, whether it is the home loan and / or an overdraft facility in the name of a third party that you stood surety for.

Furthermore, when applying for a credit facility at another financial institution, upon doing a deeds office search, the bank will only see the amount of the mortgage bond registered, reflecting a liability or a contingent liability. This may result in a possible decline, as the banks can’t verify the actual loan amount granted by the original bond holder.

The banks will limit their risk by demanding ample security for the loan they are willing to grant you. It is your responsibility to fully comprehend what you’re signing for and limit your risk in providing such securities. A mortgage bond is no exception…

• For more information, contact Tess Rodrigues managing director of Property Factor on This email address is being protected from spambots. You need JavaScript enabled to view it. or 0861 106 306.

Property Factor CC

0861 106 306

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