Home loans: Beware termination penalties

08 Apr 2010

Paying off one’s mortgage debt before the standard 20-year repayment term has lapsed may well be a financially savvy route to follow, but banks still have the right to slap various penalty interest charges on consumers who settle their home loans early.

 

Industry players note that banks have become far more stringent about imposing their termination notice periods since the introduction of the National Credit Act (NCA) in mid-2007. Section 125 of the NCA stipulates that banks are entitled to receive 90 days notice from a client of their intention to cancel their mortgage bond, regardless of when the loan was granted.

The penalty charge on early termination is equal to 90 days interest payable on the balance outstanding in the home loan – not the original loan amount. Alternatively, interest is charged on the difference between 90 days and the notice period given.

As such, penalty charges can run into thousands. For instance, someone who owes the bank R1m at an interest rate of 10% could end up paying close to R25k in penalty fees if they cancel their bond early without giving prior notice to the bank.

Penalty interest is usually charged from the day that the bank receives a request by the borrower’s attorney to provide mortgage cancellation figures. If the client didn’t give notice of his intention to cancel the loan prior to this date, the 90-day early termination fee will be included in the cancellation figures.

Another penalty that may arise is when certain fees, such as bond registration or initial administration costs, are waived by the bank when the home loan agreement is signed. Banks usually stipulate in the loan agreement that these costs will be recouped from costumers if the loan is terminated within a certain period, often within the first three years after the loan was granted.

Banks motivate early termination penalties as a way to recover costs associated with setting up a home loan facility and the loss of interest that the bank could have earned over the full 20-year contractual period.

Homeowners are advised to inform their bank in writing if they intend cancelling a bond as soon as they have sold their house, instead of waiting for the transfer attorney to do so a month or two down the line.

Despite the possibility of paying an early termination penalty, it still makes financial sense for consumers to pay off their home loans as soon as they can, particularly for those approaching retirement.

RealNet CEO Tjaart van der Walt says consumers who will be dependent on a fixed income could face a much lower standard of living if they are still paying off a home loan by the time they need to retire. “Retirees who own a fully paid-for property will not have the worth of their pensions or annuities eroded by increases in the home loan rate and inflationary pressures on living costs.”

It’s also prudent for younger homeowners to pay their home loans off sooner by putting spare cash into their bonds to reduce the capital and repayment period.

Van der Walt notes that a homeowner with an R800k mortgage who pays R300/month more than the required monthly instalment of R7,987 (at the current prime rate of 10,5%) can shorten their bond repayment term by more than two years and save a whopping R140k in interest payments. – Joan Muller

Readers' Comments Have a comment about this article? Email us now.

Is it not possible to pay off your loan but not cancel it, in other world leave a balance of say R 100, for the remainder of the 20 years. It this way you save the additional interest costs, don’t incur the penalties and if it is an access bond, provides you with access to cash should you need it in an emergency. – Anonymous

Estate agents should take notice of this matter, as they are normally the first to discuss the possibility of selling a house with the owner. They should advise owners to immediately notify the bondholder. We have been requesting agents to do this for many years, but still find that this is seldom done by them. - Antha Serfontein

Banks charge fees to raise a bond.   The monthly repayments in the early years are made up of mostly interest and not much capital so banks do not “lose out” on early repayment; they just don’t make as much as they would for the longer period.  The early repayment monies will also be lent out to someone else. - Liliane

 

 

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