How to avoid early cancellation penalty fees

In most cases, homeowners who want to sell their property will more than likely have a bond that they will need to cancel with the bank that financed the purchase of their home, says George Henderson, Broker/Owner of RE/MAX By The Sea, whose office services the coastal region KwaZulu-Natal.

“Once a homeowner has successfully sold their home, the existing bond will need to be cancelled on the transfer of the property. The costs and payment of the bond cancellation will be the responsibility of the seller,” says Henderson. “Most sellers are unaware that they need to give their bank notice of their intent to sell and in turn cancel their bond finance.”

According to legal advisers, the majority of financial institutions are now charging all sellers who have a bond a 90 day early termination charge if the seller wishes to cancel the bond prior to the completion of the term of the bond, which is usually a 20 year period, depending of the terms agreed upon. Banks are entitled to do this in terms of the legalisation of the National Credit Act.

According to Henderson, if a seller cancels their home loan within the first two years of obtaining the finance, they will be liable to pay a penalty interest of approximately 1% of the outstanding bond amount. “Essentially this means that if a seller is cancelling a bond in the region of R500 000, they will be expected to pay an early cancellation penalty fee of about R5000, likewise a bond owing of R1 million will incur a penalty fee of more or less R10 000, of course these fee can vary depending on the financial institution and other conditions. The fees charged will come off the proceeds that the seller receives from the sale,” says Henderson.

He notes that it is possible for sellers to avoid paying the cancellation penalty by giving the bank 90 days notice of intention to sell and cancel the home loan. This means that a seller should work with their estate agent and make sure that a faxed, written or emailed letter is sent to the bank before the property is even put on the market. “This is a vital step of the property sales process that the homeowner should be made aware of by their agent in order to avoid costs being incurred by the seller unnecessarily,” explains Adrian Goslett, CEO of RE/MAX of Southern Africa.

There are some circumstances where the 90-day notice period will be waived by the bank. These conditions include the following situations:

• If the property is sold within a deceased estate.
• If the seller of the property has been sequestrated.
• If the seller is buying a new property and taking out a new home loan with the same bank.

“Many sellers may think that by giving their bank 90 days notice they are actually cancelling their bond in 90 days, however, this not the case at all,” says Henderson, “They are merely letting their bank know of their intention to sell their home. If the property does not sell within that period, the seller will simply need to renew their letter of intent. The bond will not be cancelled until such time as the conveyance attorney requests the cancellation figures from the bank, which will only be done once the property has been conclusively sold and they have received all the necessary guarantees.”

In the instances where no notice has been given by the seller, the bank will regard the letter from the conveyancers requesting cancellation figures as the 90-day notice letter. The charge will then be reduced depending on the period of time taken to register the transfer of the property. This means that if the transfer is registered on day 60 of the 90 day notice period, the penalty will be reduced by two thirds and if registered on day 90, the charge will be nil.

“In certain cases where the transfer process has taken quicker than expected, some sellers are requesting that the registration only take place once the 90 days has expired in order to avoid paying the penalty fee,” says Henderson, “the better alternative is to ensure notice is given to avoid any complications and additional costs,” he concludes.

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