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Johannesburg - Recently, Fin24.com's Money Clinic received this question from a user:
"I want to cancel my mortgage with my bank. What are the implications? I can't cope with my repayments."
You can approach your bank and give up your mortgage, which is called voluntary surrender, said Colin Brazendale of Debt Counselling Help.
"But you cannot just hand the keys back to the bank and walk away. You will be liable for the debt and interest until the house is sold to recover the outstanding mortgage."
Because of the recession and job losses, many people are surrendering their home loans. Some banks have therefore started programmes to help owners sell properties, said Brazendale.
If the property is not sold, it will go to auction or the bank will keep the house until sold. This is call property in possession (PIP).
If your property is sold for less than what you owe the bank, there will be a shortfall. Most of the banks will give you a discount on this figure, but you will be liable for the rest, Brazendale said.
You will have to sign an acknowledgement of debt for the outstanding amount. You can then normally repay this amount over one to ten years, but the bank can demand the shortfall from you immediately with a court order.
Unfortunately the property market has seen negative growth over the last two years and in many instances properties are now worth less than the outstanding bond amounts, said Ebie Visser of Debtdoc.co.za.
"This option also means that you lose an investment and that you will have to pay rent on alternative accommodation."
What other options do you have?
Talk to your bank
Negotiate with your bank, said Visser. Go and see them, in many instances they will try to accommodate you.
"Do not ignore the bank. I have seen many people take the ostrich approach in dealing with their creditors when they are in arrears, but this invariably leads to tears."
Your bank may agree to reduce your payments for a set period or extend your home loan to reduce your payments.
Sell your house
If there is enough equity in your property to cover the outstanding bond amount, you can sell the property and pay the outstanding bond amount.
Being proactive and selling your house yourself may yield a better price than the bank's efforts.
If your bank takes control of the sale of your property, particularly if it ends up on auction, you will be billed for the legal and administrative costs.
Also, selling the house yourself should go faster, which means you will stop paying home loan instalments earlier - and you won't fall behind on more payments and build up larger arrears.
Contact a debt counsellor
The debt counsellor will assess your complete situation and if you are found to be over-indebted the counsellor will negotiate with your creditors for a re-structured payment plan, said Visser.
If you are under debt counselling your creditors cannot take legal action against you, or take back your house.
Your obligations include paying the restructured payments every month and you cannot obtain any credit while under debt counselling.
Make sure your debt counsellor is registered with the National Credit Regulator, and for further peace of mind use a counsellor that is registered with the Debt Counsellors Association of South Africa, he added.
All your information and particulars throughout the consultation process remain confidential, said Mark Fulton of National Consumer Relief.
"Hence you need not fear of any third party becoming aware of your financial troubles."
Renting out your house
If the rental income for your property can cover your mortgage payments, this may be an option - but only if you can find rental accommodation for yourself that is much cheaper, and only if the person who rent from you is totally reliable.
Remember also to take the tax implications of renting out your property into account.
Alternatively, consider taking in a lodger for extra income.
Consider sequestration
When you are sequestrated, all debt is written off, even the shortfall between what you owe the bank and what the property is sold for, said Brazendale.
However, sequestration should be seen as a last resort. The court will appoint an administrator or trustee to look after your finances and there are a number of drawbacks - you won't be able to start a business easily or even sign a rental contract.
For some occupations, like property agents, you could even be scratched off the professional roll.
You can only apply to be "rehabilitated" after four years. (After ten years, it happens automatically).
What not to do?
Don't wait until it is too late, and you've build up a big amount in arrears, to speak to the bank about your problems.
Handing over your property to the bank and working with the bank is better than to do nothing, said Brazendale.
If you miss payments and don't make arrangements with the bank to catch up, they will take legal action.
As soon as there is a judgement against your name, the bank is allowed to auction or sell your house without your permission.
You will have a judgement on your credit record for minimum five years and will not be able to apply for new debt. You will also be kept liable for any shortfall on the sale of the house.
Also - don't take on any more debt to finance your home loan.
- Fin24.com
Contact:
- Colin Brazendale of Debt Counselling Help on 087 808 2563
- Mark Fulton of National Consumer Relief on 0861 0861 10 or 031 564 3300.
- Ebie Visser of Debtdoc.co.za. on 082 698 4839 .
