With home loans no longer as readily available as they were in boom days, new ways of raising finance for property purchases are emerging.
Steward warns that second bonds require the approval of the bank and that in the event of payment defaults or the liquidation of the buyer, the bank’s ‘primary’ bond takes precedence.
According to Lanice Steward, managing director of the Cape estate agency Anne Porter Knight Frank, traditionally, potential home buyers got the necessary finance by going directly to a bank (usually the one with which they already dealt) or to a bond originator.
Before the National Credit Act this usually resulted in a satisfactory arrangement – and it has to be acknowledged that bond originators were often highly effective in obtaining favourable terms and conditions.
Steward says things are not so simple anymore.
Often the bank will turn down an application or agree to an amount less than the amount needed.
In these cases, they found that a family member, a good friend or the seller can be persuaded to issue a second bond to the buyer, making up the shortfall.
The procedure is the same as with the banks, she says.
The bond is registered in the Deeds Office, with the title of the property and the terms and conditions spelt out – with special care taken to stipulate interest rates and repayment conditions, which can often be more favourable to the lender than those set by the bank.
Steward warns that second bonds require the approval of the bank and that in the event of payment defaults or the liquidation of the buyer, the bank’s ‘primary’ bond takes precedence.
“They have to be repaid in full before other creditors are satisfied and they have no particular interest in looking after the second bondholder if there has been a default.”
The second bond issue does, however, have this as a safeguard but the property cannot be sold in the conventional way (as opposed to a sale in execution) without the bond being repaid.
Another arrangement is when two, three or more people get together to buy.
Presently, however, only Absa will give a multiple account with each partner having a separate account under the bond and agreeing to be individually liable for the bond payments.
Other banks allow only one bondholder.
Steward says this system has the big bonus factor that it can enable the partners to get a far bigger home loan than they would if they were on their own.
She warns that the partnership conditions have to be very carefully made and (presumably with the help of a lawyer) agreed to and signed at the outset.
“The difficulties arise when one partner wishes to sell his share - the conditions on which he or she is entitled to this should have been clearly set out in advance.”
The questions that have to be asked are:
1. Is there an agreed time before the partners can sell?
2. How will the value of the property be determined for a buyout or new partner share purchase?
3. Will the new partner be obliged to take a loss?
4. Or will they be allowed to sell on the open market and realise their profit/loss?
Generally, it is accepted that partners can transfer one partner’s bonding on a property to another entity, but in these cases transfer duty will be due and must be handled by an attorney through the Deeds Office, she adds.
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