What you need to know about mortgage bonds in South Africa

The aim of this article is to provide prospective and current homeowners with some insight into mortgage bonds, different types of bonds recognised in South Africa and addressing frequently asked questions relating to mortgage bonds.

WHAT IS A MORTGAGE BOND?

A mortgage can be defined as a document/deed in terms whereof immovable property or a real right is encumbered as security for an indebtedness or obligation and the mortgage bond enables the Mortgagee to establish a preferential right against other creditors.

The indebtedness can be a direct or indirect liability incurred by the Mortgagor and the most common forms of indebtedness/obligations are moneys lent and advanced, future debts, suretyships signed and guarantees executed.

Important Terms:

1) Mortgagor
A mortgagor is the person or entity that entered into an agreement with a mortgagee in terms whereof an indebtedness or certain obligations are created subject to the provision of security.
The mortgagor can be described as the borrower or security provider.

2) Mortgagee
A mortgagee is the person or entity that requires certain security for the indebtedness or obligations of the mortgagor in terms of an agreement entered into and between a mortgagor and mortgagee. Mortgagees are typically referred to as the “Lender”.

3) Security
In a typical property transaction, a mortgagee will require a mortgage bond to be registered over the immovable property that is financed. Depending on the financial circumstances of the Mortgagor and value of the immovable property, the Mortgagee may require additional security in the form of a surety or guarantee from a third party.

OTHER TYPES OF BONDS:

Notarial Bonds

A general notarial bond hypothecates all of the moveable property of a borrower, surety or guarantor at a specific address and is recorded in the Deeds Registry.

A specific notarial bond on the other hand hypothecates specific movable property of the borrower, surety or guarantor at a specific address and the movables can be identified with, amongst other things, serial numbers etc.

The difference between a Mortgage Bond and a Notarial Bond is that a Mortgage Bond is registered over immovable property or a real right, and a Notarial Bond is registered over moveable property.

Shari’ah Bonds

A Shari’ah Bond is normally registered in terms of a Diminishing Musharakah agreement under Islamic law and is also known as a Sukuk Mortgage bond. These bonds have grown in popularity over the years.

The concept of riba, or what is commonly referred to as interest, is forbidden by Islamic law. As a result, conventional debt instruments, such as a mortgage bond with an interest rate linked to the transaction, are not acceptable in Islamic Cultures.

Sukuk represents the aggregate and undivided share of ownership in an asset taken up by the lender in a certain project or investment opportunity.

A Sukuk investor owns a portion of the asset that is connected to the investment, and receives payment in the form of profit share or rent, rather than receiving repayment in monthly installments with interest included.

Surety Bond

A Surety bond is a mortgage bond that is passed by a third party in his/her/it’s capacity as surety for the debt of a borrower and will form part of further security requested by the lender for the obligation of a borrower.

Collateral Bond

A Collateral bond is a mortgage bond in terms whereof additional security, in the form of immovable property or a real right, is mortgaged as additional security for an existing debt or obligation of the borrower and is collateral to a mortgage bond already registered for the specific obligation of the borrower.

FREQUENTLY ASKED QUESTIONS:

What happens when the borrower files for Insolvency?

As preferent creditor, the mortgagee will attach the immovable property mortgaged and is entitled to sell the immovable property in execution in order to settle the outstanding debt of the mortgagor. The mortgagee has a preferential claim to the sale proceeds and any proceeds remaining after settlement of the mortgagor’s debt will be distributed between the concurrent creditors of the borrower.

What happens if the borrower defaults on his/her/it’s payments?

In the event that the borrower does not comply with his monthly obligations as set out in the loan agreement, the mortgagee may enforce its rights reserved in the loan agreement and mortgage bond against the mortgagor. It is important to remember that a letter of demand/notice will be issued, giving the mortgagor the opportunity to rectify the breach within a specific time period.

Failure by the mortgagor to comply with the notice will enable the mortgagee to proceed with legal action, enforcing all of its rights reserved.

What is the Additional Amount?

The additional amount varies between 20% and 25% of the capital amount of the mortgage bond and may vary from one lender to another. In the event that the lender incurs any legal costs in the recovering of any outstanding obligations or the preserving and realization of the mortgaged property, these costs may be recovered from the mortgagee.

The mortgagor will have a preferent claim in respect of these costs incurred, limited to an amount equal to the additional amount.

It is important to note that for as long as the mortgagee honors his/her/its obligations to the mortgagor, no interest is levied on this amount nor does this amount become payable to the mortgagor.

When is my First Installment due? Repayment

Part of the normal suite of legal documents signed when entering into a loan is a debit order. The first debit order payment will depend on the date of the month when the mortgage bond was registered.

If your mortgage bond is registered before the 15th of any given month, then the first debit order will go off your nominated account at the end of that same month. The installment will only include interest from date of registration to month end and may therefore be a little less than stated in the loan agreement.

Should the mortgage bond however be registered after the 15th of any given month, the first debit order will only go off your nominated account at the end of the following month. It is important to note that this installment will include interest from date of registration of the mortgage until the end of the following month and will therefore be more than the quoted monthly installment in the loan agreement.

CONCLUSION
There are a variety of options available for individuals or legal entities who are seeking ways in which they can secure an obligation. Ensure that you consult with your legal professional when entering into a transaction.

Johan Liebenberg (Director)
JohanL@vdt.co.za
Thabang Ditshego (Candidate Attorney)
Thabang.Ditshego@vdt.co.za
Ianthe Sipsma (Candidate Attorney)
Ianthe@vdt.co.za

September 12, 2023
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