Understanding mortgage bonds helps secure the best deal and ensures a smooth home-buying process.
- What is a Property Bond?
A bond (home loan) is a loan from a bank to buy property, with the property serving as security. If payments aren’t made, the bank can repossess the property.
- Types of Bonds
- Fixed-Rate Bond: Interest rate stays the same for an agreed period, offering predictable payments.
- Variable-Rate Bond: Interest rate fluctuates with the prime lending rate, impacting monthly payments.
- Access Bond: Allows you to access any extra payments made on the loan, acting as a flexible savings facility.
- Qualifying for a Bond
- Banks assess the following before approving a bond:
- Credit Score: Higher scores improve approval chances and lower interest rates.
- Income and Affordability: Monthly bond repayment should not exceed 30% of gross income.
- Employment Stability: Steady employment or consistent income for self-employed applicants.
- Deposit: Typically, a 10% – 20% deposit is required. A larger deposit reduces monthly repayments.
- Avoid New Debt Before Bond Registration
New debt before bond registration can lead to reassessment and possible bond withdrawal. Banks can reassess affordability up to 60 days after bond instruction.
- Documents Required for Bond Application
- FICA Documents to verify identity and address (certified copy)
- Proof of Income: Recent payslips or financial statements (if self-employed)
- Bank Statements (usually 3 to 6 months)
- Sale Agreement (copy of the signed offer to purchase)
- Bond Approval Process
- Application: Submit required documents to the bank.
- Credit Assessment: Bank checks your credit score and financial history.
- Property Valuation: Bank appraises the property to confirm its value.
- Approval in Principle: Conditional approval, subject to certain conditions (e.g., valuation).
- Final Approval: Once all conditions are met, the bank issues a Loan Agreement.
- Bond Registration: Appointed bond attorney registers the bond at the Deeds Office.
- Transfer and Payment: Once registered, the bank pays the seller, and the buyer starts monthly repayments.
- Documents Required by Bond Attorneys
Bond attorneys cannot draft your documents without:
- FICA documents – Identity Document, Proof of Residence and Income Tax Number
- Confirmation of banking details and selected debit order date, and
- A copy of the new drafted title deed from the transfer attorney.
Delays can occur if any of these documents are missing or incorrect.
- Possible Amendments to a Bond
Once the bond attorney receives the instruction, they will provide a breakdown of the bond conditions. Here’s what to check:
- Your ID number or name is incorrect on the bond instruction,
- Your marital status is outdated or incorrect, or
- The property description is incorrect on the bond instruction.
- Interest Rate – Ensure it matches what you agreed to.
- Bond Term – If you plan to pay off the bond sooner, you can request a shorter term, which will increase your monthly instalment.
The bond attorney will not have access to your initial application form, so review the conditions carefully. You will need to visit the attorney’s office to sign bond documents. Some attorneys offer flexible meeting times; however, it’s your responsibility to ensure the documents are signed promptly.
- Costs Involved
- Bond Registration Fees: Paid to the bond attorney to register the bond in the Deeds Office.
- Initiation Fee: Charged by the bank for processing the bond application.
- Monthly Service Fees: Included in the monthly instalment.
- Deposit: A down payment on the property (typically 10% – 20% of purchase price).
- Homeowner’s Insurance: Required by banks to cover the property against risks (e.g., fire, flooding). This can be through the bank or your own insurer. If buying in a complex or flat, check if this is included in your levies. Note that building insurance is not the same as household contents insurance.
- Life Cover (Bond Protection Insurance): May be required and is always recommended to cover bond repayments in case of death; disability or retrenchment. You can use your own policy provided it covers the amount required by the bank. If you choose the bank’s insurance for faster bond registration, you can switch to your own policy later. Always request a copy of the insurance policy from the bank once the bond is registered.
- What is an Interest Rate
- Prime Interest Rate: The base rate set by the South African Reserve Bank, affecting bond rates.
- Interest Rate Options:
- Fixed Rate: Stays constant for an agreed period, offering payment stability.
- Variable Rate: Changes with the prime rate, impacting monthly repayments.
- Interest Calculation: Compounded monthly, so paying more than the minimum reduces the total interest payable.
- Repayment Options
- Standard Repayment: Fixed monthly instalments over the loan term (usually 20 – 30 years).
- Additional Payments: Making extra payments reduces the loan term and interest paid.
- Lump Sum Payments: Large payments directly to the capital balance reduce interest.
- Access Bond Facility: Allows withdrawal of extra funds paid into the bond.
- Important Considerations
- Affordability: Don’t just consider the bond repayment – factor in rates, taxes, levies, insurance, and maintenance costs.
- Bond Approval Period: Pre-approval is valid for about 3 to 6 months.
- Bond Switching: Refinancing or switching bonds to another bank may offer better rates but comes with costs.
- Impact of Interest Rate Changes: Monthly repayments fluctuate with the variable interest rate, affecting affordability.
- Tips for First-Time Buyers
- Get Pre-Approved: Know your budget before house-hunting.
- Shop Around: Compare offers from different banks for the best interest rate.
- Negotiate the Interest Rate: Banks might reduce the rate for clients with good credit scores.
- Save for a Deposit: A larger deposit reduces monthly repayments and total interest paid.
- Understand the Fine Print: Read and understand all terms and conditions in the loan agreement.
- Bond Calculators: To estimate monthly repayments and total interest payable.
- Professional Advice: Consult with a bond originator who can assist with multiple bank applications at no cost to you.