What is Repossession?

South African law allows that if you default on your bond repayment for 3 months or more, then the lending bank may cancel the agreement with you. They can repossess your house and sell it to recover the money that you still owe to them.

However, there are some very sound financial reasons why the bank will avoid doing this.

Costs of Repossession

The banks don't necessarily want to incur the costs involved in repossession, which include:

• legal fees involved in obtaining a court order to secure the home;
• maintaining the home in the interim;
• loss of repayments on the loan for several months or even years, while they are in the process of trying to sell off the house;
• lower purchase price generated at the public auction; and
• sheriff’s commission from the Sale in Execution.

A repossessed home must go through a process called Sale in Execution, which is a public auction held by a sheriff of the court. The property will still be registered in the homeowner's name. The bank cannot accept or decline the offers, since it is not their property.

It is a well-known fact that these properties often sell for well-below their market value. On average, the bank will typically only recover 70% of the value of the loan, due to the distressed and urgent need for sale. The banks prefer not to repossess property, but rather help the clients to the best of their ability to keep their property.

Banks would much rather ensure they are getting regular monthly income from the homeowner's monthly bond repayments. Banks use funds from other lenders and extend the loan to the end-user (or homeowner). For example, the bank typically borrows funds at the repo rate (currently 6.25%) and extends a mortgage at the prime rate (currently 9.75%), earning 3.5% in interest on the loan. In other words, their profit is generated mainly from the interest the homeowner pays over the life of the loan.

No matter how small the repayments (i.e. switching to interest-only for a period) the bank is always motivated to continue to receive payments from the homeowner. Repossession of a home due to a default on repayments would be the very last resort for a bank, when it is clear the homeowner is in no position to contribute a monthly payment in the near future.

How do I get a home loan that I can afford?

They key is to consider your sustained monthly income over the next 10 to 20 years. The bank will be mostly interested in your monthly income rather than any tangible assets you have.

Why is the bank so concerned with my income – can’t they use my existing home as collateral? This is a typical question asked by purchasers – but due to the loss of profit the bank will incur if they opt out of the agreement early, most banks will only assess your affordability in terms of your monthly income alone.

It’s always beneficial to get a prequalification completed with a reputable bond originator, to know what you can afford and avoid disappointment. At Phoenix Bonds, we can complete a personalised prequalification with expert advice and support within 24 hours of your consult. In addition, we can apply to up to 10 banks on your behalf to ensure you get the best possible offer. The best part – it’s totally free for you!

To complete a prequalification or apply direct through us, GET STARTED HERE.