Early bond cancellation blues

2013-07-10 10:28
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A Fin24 user has voiced concern over the three-month notice period banks require for the early cancellation of a bond. He writes:

I am concerned about the three-month penalty that banks charge when a homeowner wishes to cancel his bond early.  My concerns are as follows:

1. If an individual cancels his bond prior to the completion of the bond period, a penalty is imposed unless three months' notice is provided to the bank. This penalty is due to the bank “losing out” on the remaining term of the contract. 

How does this “loss” change if the individual gives the bank three months' notice? 

2. The penalty is charged due to the contract between the bank and the homeowner being cancelled early. Given that banks borrow at the repo rate and on-lend this to the bond-seeker at a higher rate, surely the banks have already profited by the difference in these two rates? 

Why should they go and levy a penalty when a homeowner wishes to cancel his/her bond early?

3. Why is the same penalty imposed on an individual who had a bond for, say, 17 years (three years remaining) and an individual who has only gone two years into his 20-year bond?

4. When you wish to sell your property, there is no way to determine for sure when a buyer will be found, how long the buyer will take to get his/her bond approved, how long transfer will take, etc. So how will the seller ever avoid the penalty? 

Absolutely unfair.

5. ALL banks charge the three months penalty – surely this is an indication of collusion among the banks?

Safiyya Boolay, head of existing business FNB Home Loans, explains how early cancellation fees are calculated: 

Early settlement fees are charged only in terms of the provisions of the home loan agreement. The contract reads as follows:
 
“The Customer is entitled to settle the outstanding balance in full in respect of this agreement with or without advance notice to the Lender. The amount outstanding is the total of the following:-
 
The unpaid balance of the Principle Debt at the time;
The unpaid interest charges and all other fees, charges and insurance premiums payable by the Customer to the Lender up to the settlement date, and an early termination charge equal to no more than the interest that would have been payable under this agreement for a period equal to the difference between 3 (three) months and the period of notice of settlement, if any, given by the Customer.”
 
So if the cancellation is scheduled for a period of 90 days or greater than the day on which notice of cancellation is given, no early settlement fee is charged.
 
Where the 90 days or any portion thereof is not served, the calculation is as follows:
 
Outstanding balance:         R X
The interest rate:              x%
 
90 days (which is the notice period) divided by 365
 
For example:                R238 845.15 (outstanding balance as of 06/07/2013)
                                   x         6.85%
                                   x         90 days (notice period)
calculated esf               =   R3 633.32

 - Fin24

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