Because we refer to property related loans as “mortgage bonds”, folk often assume that home loans and mortgage bonds are one and the same. They are not! One is the security given to the bank under the mortgage bond agreement and the other is the actual loan obtained. To complicate matters further, they don’t have to be of 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 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.
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…
"When we advise you, we are always conscious of reducing your risk exposure and saving you money in the long run."