Few achievements in life compare to the sense of pride, elation and accomplishment that accompanies buying a house. In all probability, a house is the single most valuable asset you can have. Unfortunately, this great achievement can bring along emotions and great anxiety, given the intimidating nature of today’s marketplace.

The reality is that the successful conclusion of a transaction often depends on whether or not a purchaser will be able to afford it. The price of a home is usually so high that a person rarely has sufficient cash handy for the purchase. One of the options available is to borrow money from the bank or other financial institutions. A home loan is also referred to as a bond or mortgage. This will allow a potential homeowner to spread his/her repayments over a longer term.

Throughout this section we strive to give you the best advice on all aspects of financing your home. We will help you to understand the different interest rates, fees and charges, as well as terms and conditions. We will also explain to you the features of the different loans and why specific ones are more suited to your individual requirements.

Where to Start

Prevention will always be better than cure. Before investing hundreds of hours searching for your dream home, and likely suffering a lot of financial and emotional wastage, ask a mortgage consultant to get you pre-qualified. Pre-qualification helps you to “zoom in” on the correct price range, and also gives you an edge over competing buyers. A seller deciding between your pre-qualified offer and an unqualified one, will more than likely pick yours. It also gives you leverage when negotiating with a seller in a non-competitive atmosphere. In other words, it essentially makes you a cash buyer.

However, keep in mind that although the pre-approval of a bond application indicates to the interested parties, for example sellers/estate agents, etc. that the financial institution concerned will probably grant you a loan against, it hardly legally binds the financial institution or the buyer in any manner towards anybody. It should rather be seen as a way of assisting the purchaser to “shop around” for correctly priced properties. The full procedures of registering the bond and the subsequent admin still need to be followed.

What is a Mortgage Loan?

The various names can make this quite confusing. The word "mortgage" means to "pledge" or "promise" something. In other words when you take out a mortgage loan you "promise" your property as security to the lender in case you cannot pay back the loan. The Mortgage Bond is the document that you sign that contains this promise. The terms "mortgage" and "bond" therefore usually mean the same, and are used interchangeably. When you buy a property and get a loan with a mortgage lender, the house is yours. It is registered in your name and you are fully responsible for it.

The granting of a bond in principle is done by a financial institution on information furnished by the purchaser and contained in the Deed of Sale. It is normal that a Deed of Sale contains a term that the purchaser (or another party on his/her behalf) has to furnish a guarantee or an undertaking acceptable to the seller, or his/her transferring attorney, for the purchase price (or part thereof) within a stipulated time period. The intended guarantee is usually issued by the financial institution granting the loan and the undertaking is usually issued by the conveyancer acting on behalf of the financial institution.

Purpose of registering a Bond with the Credit Provider

A debtor will only be able to grant security in the form of a mortgage bond if the property that is to serve as security under the bond is registered in the debtor’s name. A mortgage bond must be registered in the Deeds Registry for it to be valid and effective against all persons. On registration of a bond, the mortgagee/bond holder (credit supplier) obtains the following claims against the immovable property of the mortgagor (owner):

• If the borrower defaults on his/her repayments, then the bank has the right to follow a legal procedure (foreclosure) to “attach” the property after obtaining a court order. It will then be “sold in execution” to obtain the outstanding amount of the loan (and the cost of the lawsuit).
• In the case of insolvency of the mortgager, the mortgagee has a preference right over other creditors in claiming against the mortgager. This means that the bank receives payment before any other creditors.

Practical Implication of a registered bond:
A real right is registered over the property in favour of the financer. The owner of the mortgaged property will not be able to sell or transfer his/her property without the consent of the Mortgagee (bank) to the cancellation of the bond. This consent will only be given if the owner pays the outstanding amount.

Therefore, a Mortgage Bond is a legally binding contract with a clear set of obligations:
A mortgage bond is a (real) right over the property of another, which serves to secure an obligation (by the owner/debtor/mortgager). The borrower will have a contractual obligation to repay the bank the money that is advanced to purchase the home. When entering into a mortgage agreement, it is like making a promise to the mortgagee (bank) that you will repay your loan in (mostly) monthly instalments.

A mortgage bond actually constitutes two separate rights:
Personal Right: The so-called principal debt or “loan” which is the agreement between the mortgagor and the mortgagee and a Real Right: The bond which is being registered over the property to secure the loan and is enforceable against the whole world at large.

Mortgagor: The person who owns the property is called the “property owner”. If the property owner gives his/her property as security for a loan under a bond, he/she is called the mortgagor and becomes the debtor.
Mortgagee: The bank (or other person) that grants the loan (or other benefit), for which the property is going to serve as security, is called the mortgagee.

Who can be mortgagee or mortgagor under a mortgage bond?
The mortgagor will only be the house (property) owner. In most cases some or other bank will be the mortgagee under the bond. But a mortgagee is not necessarily always a bank. If a grandmother lends money to her granddaughter and decides she needs security for repayment in the form of a bond over her granddaughter’s property, the grandmother will be the mortgagee and the granddaughter will be the mortgagor under the bond. This could also be the case in an employee/employer relationship. The granddaughter may at a later stage allow a second bond to be registered over her property, in favour of the company that she works for.

Types of Dwellings/Properties qualifying for Bonds

Depending on the different banks and financing possibilities, it is preferred and easier to obtain finance for vacant residential stands (erven), normal houses, and semi-detached and sectional title units (townhouse or flats). 

Generally units in a sectional title complex consisting of mixed/combined tenancy of shops; offices and residential units are not that popular when it comes to the marketability thereof. Other properties not easily accepted as security for a mortgage might be blocks of flats, boarding houses, crèches or nursing homes, churches and hotels. Other high risk properties may be timeshare or unpopular development schemes and complexes. 

When it comes to agricultural smallholdings (plots), the financial institutions will normally look for factors like water and power supply and whether or not there is a main tar road leading to the property and whether it is inside or outside of municipal areas. In most cases a “full loan” is not granted, which means the purchaser has to give at least 15% to 30% deposit, depending on the circumstances.

Depending on the client, farms, vacant land, and commercial or industrial properties, as well as shares in properties, will also take serious motivation from clients and consideration from the financial institution involved.

• Criteria for granting a bond/loan:
  
  • Condition of property and the level of security the property offers for the money borrowed.
  • Age and design, as well as the type of construction, outlook and level of maintenance.
  • Location and environment, the potential demand for houses in that area, as well as crime trends.
  • The resale potential and general risks involved.
  • Conditions of title deeds (servitudes) or perhaps town planning considerations.

• Mortgage/loan Consultant Services:
  
  • Evaluate clients’ financial situation and give professional advice on financing a house
  • Pre-qualify clients for loans so they know exactly how much they can spend
  • Outline the costs and when these must be paid, thus speeding up the process
  • Explain the implications of different home loan options
  • Advise on paperwork and procedures between the bank and attorneys
  • Clarify the home-buying journey, outlining responsibilities and pitfalls to avoid
  • Remain on hand to assist buyers until the day they move in

A valuator will in most cases be instructed to inspect the property. Once the bank satisfies itself that the property provides sufficient security for the loan requested, it will approve the application and instruct conveyancers to register their security over the property against the Title Deed. This security is called a mortgage bond. The conveyancers prepare the bond documents for signature by the borrower.

Most lenders consider 4 key factors to assess your ability to qualify for a home loan:

• Income: Your gross monthly income and secondary income (commissions, bonuses), history of employment, stability of income, education and even potential for future earnings.
• Credit History: Your history of debt repayment, total outstanding debt, highest balance and your highest monthly debt balance.
• Assets: Your cash on hand, savings and checking accounts, stocks, bonds or any other type of liquid asset.
• Property: The estimated value of your intended house must be sufficient to secure the loan. Lenders loan you no more than a certain percentage of this value.

The loan amount you qualify for will be determined by several key factors like:

• The deposit: Whereas a current homeowner can rely on equity from their home sale, a first time homebuyer is limited to the money they can save. Providing a large deposit definitely makes it easier to qualify for a mortgage and enables you to get preferential interest rates. The amount of the deposit will be determined by your repayment ability and sometimes by the property valuation.
• Your ability to qualify for the Mortgage: Your monthly mortgage payment of principal, interest, taxes and insurance should not exceed 25% of your monthly gross income. Your monthly housing cost plus other long-term debt should not exceed 30% of your monthly gross income.
• Additional Costs: The registration of a mortgage bond involves additional costs over and above the transfer costs and buyers who plan on purchasing a property with the help of a home loan have to keep the cost of registering a mortgage bond in mind. Mortgage bond registration costs consist mostly of the attorney fees for the conveyancer attending to the registration of the mortgage bond, as well as stamp duties. The amount of the attorney’s fees depends on the size of the loan. The more a buyer borrows, the higher the mortgage bond registration costs. Most Banks also have an administration and valuation fee that is normally part of the client’s bond fees.

Application process

To enable mortgage consultants and the bank to process and approve your client’s home loan finance without delay, certain minimum bank requirements, information and documentation will be needed to prepare and process your application.

The information required will vary on your loan option, and your personal financial situation. The following list of documents is usually required when applying for a new home loan. For a fast and easy loan process, it's advisable to have these items available when you are ready to complete your application.

In the case of joint applicants, companies, trusts or where personal suretyships are provided for the loan, credit checks are normally done on all parties involved. The bank will then further process the application to satisfy itself that the client’s income is sufficient to cover the repayments.

Natural Persons – Salary earners

• All Applications
  
  • A copy of your ID document
  • A copy of the Offer to Purchase, containing seller's and purchaser's details (not necessary for a pre-approval)
  • Proof of income
    You will need to produce the latest salary slip or a letter from your employer with a breakdown of your salary and deductions.
  • If you are self-employed then you will need a letter from an accounting officer confirming your income, or a statement of assets and liabilities
  • 6 months’ worth of bank statements
    
    
• Self employed Persons
  
  • Auditor’s letter confirming monthly drawings
  • Financial statements
  • 6 months’ business bank statements
    
    
• Commission / Overtime Earners
  
  • Commission based on average earnings over the previous 6 months may be taken into consideration, provided it is expected to continue. It is best to obtain salary slips and 6 months’ personal bank statements.
  • Overtime is normally not considered as income. However, if it seems to be of a permanent nature it can improve the client’s chances of obtaining a loan.
  
  
• Close Corporations / Trust / PTY (LTD) Companies
  
  • Copy of financial statements. You may be required to produce a full set of financials e.g. balance sheet, income statements and so on, which must be signed by the auditor.
  • Details of all the directors / members (Documents as per natural persons for all members)
  • Founding statement of the close corporation
  • Close corporation certificate
  • Company certificate
  • Memorandum and Articles of Association of company
  • A resolution by the directors / members of companies / close corporations advising who may sign the home loan application / pre-approval for the purchase of the property.

Most financial institutions will be reluctant to finance insolvents who have not been rehabilitated, mentally disabled persons, persons not yet 21 (unless emancipated), persons under curatorship, administration, or those who have a garnishee order against them.

Credit applications and Rating

Bankers, who are generally conservative by nature, prefer their prospective clients to rate as average or good in all the criteria. They only allow their clients to rate bad in one category if there is a corresponding “good” in another. A Banker will seldom sanction a loan to a client who rates badly in integrity.

• Affordability
  Affordability is measured as a ratio of the purchaser’s bond instalment to the household gross income. The bond instalment is calculated by the taking the bond amount, dividing this by one thousand and then multiplying it by the bond factor. The bond factor is determined by the interest rate and period of repayment that the purchaser qualifies to obtain from the bank. Banks have various interpretations of what culminates in the term “gross monthly income”. The generally accepted view is the monthly amount on the pay slip plus all “hidden” income, such as an employer’s contribution to medical aid, etc. Gross income also includes a partner’s salary/income, but would normally exclude bonuses. Income has to be consistent and the client’s ability to service the debt on a monthly basis has to be proved to the bank. Where the client is a commission earner, the bank will generally require the previous six months’ commission statements.
• What is Equity?
  This is the cash (or security), as a percentage of the purchase price, that the purchaser invests in the property transaction. Banks feel more comfortable with the knowledge that if the purchaser decides not to pay his/her monthly bond instalment and the bank repossesses the property, that the purchaser has some sort of cash involvement in the transaction which will ultimately be lost. The idea behind equity is to “prevent” a person from “walking away” from his/her financial obligations because he/she has a cash involvement in that transaction.
• What does Collateral mean?
  Collateral means security pledged in addition to the principal security (property in most cases) as guarantee for the repayment of monies owed by the mortgager. It is something that goes together with/parallel to the security offered.
  Example: If the selling price of the property the client wants to buy is higher than the amount of the loan they qualify for, the bank may ask them to obtain additional (collateral) security for the loan. This can also involve an increase of the deposit amount.
• Security
  This is the physical property or collateral provided by the purchaser to the bank, to secure the loan. The bank’s valuator will view and inspect the property and provide a report to the bank in respect of the property’s condition, resale potential and the area surrounding the property. Obviously a house in a well-established suburb is better security for a mortgage bond than a ramshackle holiday house on the outskirts of the countryside.
  Always keep in mind: To pay a bigger deposit can only benefit the purchaser/mortgager. One only pays interest on the amount you borrow; if you borrow less, you pay less interest.
• What are Guarantees and Undertakings?
  Banks and conveyancing firms work with guarantees and undertakings to eliminate the risk of monetary loss in property transactions. It is also a way of providing a “bridge” of trust between the different parties involved in a property transaction.  
  Guarantees in the transfer process are usually issued by banks and financial institutes which have agreed to lend money for the purchase price (or partly) under security of the registration of a bond. The guarantee is an undertaking to pay the conveyancing attorney a specified amount of money on the happening of registration of the bond, simultaneously with registration of transfer of the property subject to certain terms and conditions (like transfer of the property, registration of bond in their favour, cancellation of other bonds). The guarantee may be revoked under certain circumstances provided that the beneficiary is advised of withdrawal before registration.
  An Undertaking (to pay the proceeds of a bond to the seller of a property) is issued by the attorneys attending to the registration of mortgaged bond on being assured that they will be placed in funds, and this takes the form of an original written document handed to the seller's conveyancing attorneys. The document is substantially similar to the guarantee but, instead of being issued by a bank, it is a promise by a firm of attorneys, on the firm’s letterhead, to pay a certain amount to a specified person on a certain event taking place. Upon receipt of this written undertaking, the transferring attorneys will be in a position to proceed with the registration of a transfer and the bond attorneys will simultaneously register a bond against the property.
  
  

Types of Bonds

Banks cater for the general banking needs of the public and design packages with different banking products for marketing purposes. There are generally three broad categories of mortgage lending business (each bank will have different names):

1. General home loan bonds
2. Covering bonds or continuing covering bonds
3. Commercial Bond

• General home loan bonds
  General home loan bonds are mortgage bonds registered over residential properties as security for loans granted to the homeowners. There are a variety of options available in the commercial world when it comes to home loan options and the client’s reason for requesting a loan forms the basis for classifying bonds into certain categories. These are the typical bond transactions one comes across every day in conveyancing firms:
  
  
  • Bond-to-buy: Traditional type of bond to secure a loan made for the purpose of enabling a purchaser to buy a particular immovable property.
  • Switch bond or take-over bond: This is where the borrower changes his/her bank.
  • Further bond: The bank advances further money to a client when it already holds one or more bonds over the client’s property.
  • First bond: The client already owns the property, but it has not been mortgaged until now. The client now requires funding/credit facilities and offers the property as security.
  • Building bond: Bond to secure a loan granted to the client for purposes of building a new house or for substantial renovations to an existing one.
  • Covering Bond: A bond registered to secure a debt which at the time of registration of the bond, does not yet exist. The security provided is to cover the obligations of a future or anticipated debt. This means the outstanding balance of the loan may fluctuate. The essential element is the fact that it serves as security for a debt to arise in the future on a running account with the advantage being the flexibility. In the public mind the term “access bond” is the generic description of this type of bond. Clients have instant access to finance without the need to formally apply for a new loan. Clients have the flexibility of paying off their home loans and then, once a portion has been repaid, to withdraw the money again from the loan account.
  • Collateral Bond: Additional security for an obligation where security has already been given.
  • Surety Bond: Registered by a 3rd party to provide security for debt of another.
  • Indemnity Bond: Nothing more than a surety bond; passed by a principal debtor in favour of surety who carries suretyship for payment of an overdraft.
  • Commercial Loans (Business and Development): Commercial loans granted on properties generating rental income in suitable and economically active areas. Development loans are considered to be loans granted for the development of multiple sectional title units or residential properties. In general, commercial bonds are complex in nature and need to be very carefully structured to minimise the risk of loss to banks.
• How does a Building Loan work?
  A Building Loan is basically a mortgage loan which is paid out in specific proportions on the progressive construction of a house, over a specific period. It is secured by the completed development of an existing building. The builder can complete the home and then ask for payment. In this case a completion certificate (from the town council or municipality) would be needed, as well as signed letter (occupation certificate) from the owner that states his/her satisfaction. Three possible scenarios exist in the case where a bank grants a loan (to be secured by a bond) for the borrower to build a house on:
  
  
  • The borrower buys a vacant stand and simultaneously enters into a building agreement with a builder (plot and plan option)
  • The borrower is already the owner of the vacant land (mortgaged or unmortgaged) and has now decided to build on it. For this purpose he/she applies to the bank for a loan
  • The borrower is the owner of the property and wants to renovate
  
  The client then enters into a written agreement with a builder to build a home or to make alterations according to a plan and specifications that they have signed (building contract). As stipulated in the contract, the builder must build and the owner must pay. The contract will also specify which extras and finishes are chosen for the home. One of the risks involved is the fact that the builder might not perform as agreed or the building work might be sub-standard. To apply for a building loan, most banks will require at the very least: proof of ownership, approved building plans, a reputable contractor (as opposed to “owner-builders”), compliance with legislation and local authorities, and a signed waiver of builders’ lien.
  
  One of the differences between a Building Loan and an ordinary loan is the fact that the full proceeds are not paid out on registration of the bond but based on progress reports. Progress payments can also be made against sections of the work completed and the project will normally be monitored carefully to ensure satisfactory completion. A valuator (assessor) who specialises in building projects is mostly entrusted with this duty. It also means that the assessor will go to the property several times during the building process as well as upon completion. 
  
  
• Paying and period of your bond
  In an attempt to soften the blow of higher interest rates and in a market where future interest rate trends are difficult to predict, many home purchasers are applying for the longest possible repayment periods on their home loans and paying bigger deposits. In general banks provide a home loan for anywhere from 10 to 30 years. Debit orders are the preferred way of repayment, but clients can negotiate with their bank if this is not the most convenient way for them to pay.  
  
  Home Loan Repayment Factors
  Please make use of the "Bond Repayment Calculator" provided on this site
  
  Penalty clauses in home loan agreements
  Many homeowners (mortgagers) are not aware of the fact that the average home loan agreement of most major banks contains a “penalty clause” for the early cancellation of the mortgage bond. This penalty for early cancellation, although rightfully there, can do more harm to the mortgager than anticipated if it is ignored. In terms of this clause, the mortgager is typically required to give the relevant bank at least three months’ notice prior to cancelling the bond.
  
  In reality this means that anyone cancelling his/her bond will be liable for the penalty (depending on the amount of the loan) if the condition is not respected. In many cases this clause may give rise to difficult positions involving the practical reality of giving full notice. If prior notice is not given, the bank will take the notice period from the date they receive the request for cancellation figures from the conveyancer handling the transfer. Normally, if clients go back to the same bank they used initially within a prescribed time to re-apply for a new bond over a new property, these interest rate charges may be waived.
  
  A seller will obviously not give a notice of cancellation until such time as he/she has concluded a deed of sale and, moreover, until all suspensive conditions of the sale have been met. From the date of sale, it typically takes four to six weeks before a transfer is registered and the bond simultaneously cancelled. The purchaser obviously cannot be expected to wait an additional six to eight weeks so that the seller can give sufficient notice to the bank.
  
  Sellers are often not aware of this provision until they want to sell their property and then are faced with the penalty. Clients are in general very annoyed by this unexpected “extra” cost of the transfer. This situation can, in most cases, be prevented when an agent warns the sellers so that the necessary communication can occur in time. Banks would in general be open to prevent and discuss this with clients, as this is precisely the sort of thing that makes a bank unpopular.
  
  
• Can one Mortgagee under a Registered Bond be replaced by another?
  It is possible and referred to as “cession of a mortgage bond”. When the word “cession” is used, it refers to the “transfer of rights” of the mortgagee held under a bond. A mortgagee can therefore cede his/her rights to another mortgagee and it is commonly referred to as “substitution of mortgagee”. With the necessary signed consents, this transfer of rights is then registered in the Deeds Registry and endorsed on the bond.
  
  
• What about the existing bond; can this be taken over by the Purchaser/new Owner?
  The general rule is that the existing bond over a property first needs to be paid in full and be cancelled before the property can be sold and transferred to the new owner. The Deeds Registries Act, however, does make provision for the substitution of the debtor and, in exceptional cases within the prescribed guidelines, the seller’s bond can be taken over by the purchaser who will then become the debtor under the bond.
  
  Although this is not common practice and in a new bond is normally registered on transfer of the property to the purchaser, banks may also allow the takeover of the mortgager in the case of a mortgage being given by a close corporation. In this case the new members will basically “step into the shoes” of the previous members and also take over the obligations of the existing bond.  This is only in limited cases and most agreements banks have with current members regarding financing specifically stipulates that existing members should notify the bank immediately of any change in the members interest of the close corporation.
  
  Ranking of Bonds
  
  It is possible for the property owner to agree to more than one mortgage bond over his/her property and there are no limits to the number of mortgage bonds that can be registered over a property. However, in practice, the value of the property and the amounts secured by bonds already registered over it will determine whether it can “carry” further bonds.
  
  Normally, the ranking is determined by the order of registration; the first bond will rank first and the next one second, and so on. Both the bonds are secured against creditors and the company’s bond will rank second. However, depending on waivers and agreements between the parties involved, it may also be possible for the bonds to have equal ranking or that the second bond may actually have a “first ranking”. 
  
  Ranking is important for it determines how the proceeds will be distributed after a sale of the property. The first ranking bond will stand first in line to receive its money, followed by the rest in line with their rankings. Normally banks will not consent to further bonds over the property of a client unless these further bondholders comply.

On Interest Rates

In South Africa and Namibia, banks borrow money from the Reserve Bank/Central Bank and are charged interest on those loans. The interest they are charged is determined by government and is known as the Repo Rate. The bank then lends this money to clients to enable them to purchase property, cars and other consumer goods on prime rate and subsequently charges the interest rate from them. Although economics indicated that we should not be overly concerned about further interest rate hikes, the latest repo rate hikes indicate prime rates rising to 16% shortly. The weaker Rand (and Namibian $) and an increase in consumer spending are but a few factors that influence the interest rates. For residential property, the negative impact of interest rates is quite significant and will probably keep the market on its deteriorating trend for the time being.

Regarding Interest Rates and Loans

• Variable Rate Loan:
  This is probably the most common form of loan available. With a variable rate loan, interest rate is linked to the base home loan rate which moves up and down depending on market conditions. If the base rate decreases by 1% so will your interest rate and, of course, if the base rate increases so does your home loan rate.
• Fixed Rate Loan:
  Here your interest rate is fixed for a specified period, generally between one and two years. Generally the fixed interest rate will be slightly higher than the base home loan rate when the loan is taken out. A fixed rate loan protects you from rising interest rates and gives you the certainty of knowing exactly what your payments will be. However, it does not allow you to benefit from any decreases in the interest rate over the fixed period.
• Capped Rate Loan:
  This type of loan allows you to benefit from any decrease in interest rates, but has a maximum rate built-in so you never pay more than the capped rate. These loans are not always available from banks and generally the qualifying criteria are stricter.

Insurance

Immediately after approval it is normally time for life insurance, property assurance and possible suretyships to be taken care of. Since homeowner’s insurance is a long-term expense, getting the best deal here brings savings that continue and will add to your efforts of delivering professional service to clients.

1. Homeowner’s insurance (covers the structure) will be required by the financing institution and should normally be effective from dates of transfer and possession according to the sales agreement.
2. In most cases, life insurance covers the owner and partner’s life for the outstanding amount still owned. Although it is not legally compulsory, a life insurance policy should always be taken out when a bond is granted for a home – and it should be large enough to cover the full outstanding sum owed on the home.
3. The third type of insurance for homeowners will be household insurance that covers the contents of homes against things like theft and other losses and damages. It is good to have this coverage from the date of occupation onwards.

Note on homeowners insurance (structure) and life insurance:

1. In the case of mortgaged properties and homeowner’s insurance, the mortgagee will mostly establish the sum insured and take care of the insurance to protect his/her interest in the property and the premium will simply be added to the bond repayments. If however, the borrower can obtain a better rate elsewhere, he/she is free to insure the property with any insurer of his/her choice, provided that the mortgagee has: proof of the identity of the insurance carrier, proof that it is in agreement with the amount the property is insured for, proof that the policy is current, and ongoing proof of premium payments. This may sound cumbersome but it is not an insurmountable problem and there will, after all, be savings on the premiums.

The sum insured under a buildings policy must be the full replacement cost of not only the building, but all other fixed improvements on the property, for the property to be comprehensively insured. The market value of homes or the local authority’s rates valuation has no relationship to the rebuilding cost.

In the event of a claim, the risks and consequences can be categorised as follows:

• Over-insurance (Valuation too high): The insurer will honour the claim minus the excess amount, as may be stipulated in the contract. Over-insurance means that one is paying too high a premium for the same benefit as when being insured to value.
• Insurance to value (Correct valuation): The claim is honoured, again minus the excess amount. In this instance the correct premium is levied as the property was insured for its true replacement value.
• Under-insurance (Valuation too low): The insurer will apply "the average" and only partly honour the claim. The remainder of the claim will be for the insured's own account. The insured will be financially deprived - sometimes to such an extent that he/she might not be able to restore the property to its former condition.

The only proven method to obtain an accurate assessment of the replacement cost of a building is to employ the services of a registered valuer whose work is backed by professional indemnity insurance. Thereafter, make sure you keep the assessment up to date by telling your insurance company if you improve your home/building – perhaps by installing under floor heating or building an extension. Also, ensure that the building is well-maintained at all times.

Owners of fully owned homes or buildings are not compelled by legislation to insure their homes, with the result that a large number of buildings are not insured at all or are under-insured. Some argue that a building is hardly ever destroyed in totality and it is therefore not necessary to insure for the full replacement value, believing that they will have adequate cover for partial damage. Nothing could be further from the truth, as the settlement of the small claim will be directly proportionate to the percentage by which the building is underinsured. The savings on the premium is not worth the risk.

Legislation, however, does exist in respect of insuring Sectional Title buildings. It was introduced to protect the members of Body Corporates, among other things, against unilateral decisions regarding sums insured. The sections dealing with the duties of Body Corporates, state that they are "to insure the building or buildings and to keep it insured to the replacement value thereof against fire and such other risks as may be prescribed".Also take note that there may be exclusions and exceptions, as in properties situated downstream of the Hardap Dam and the lower Fish River and its tributaries within the area downstream of the Hardap Dam.

2. When it comes to life insurance; it is possible and has also happened before that a wife or husband with children have to move out soon after the spouse has died because large sums were still owed on the home which they could not pay. Life insurance is compulsory on certain bonds. Mostly clients do not need to purchase life insurance from the bank, but simply have to prove that they are covered.

There will mostly be three possible conditions from banks when it comes to life insurance and granting a loan:

• The bank requires the borrower to take out life insurance (or additional): This makes provision for the unfortunate eventuality of the borrower dying and there being no one to pay the monthly bond instalments. Applications for life insurance as well as dealings with brokers may be requested.
• The bank requires cession of the existing life policy: Some borrowers refuse to take out more life insurance as they feel they have sufficient cover already. In such a case, the bank may instruct the client to obtain a signed cession form wherein the borrower cedes to the bank the rights under the existing life insurance policy. Proceeds under the policy will go to the bank first to pay the outstanding amount and the remaining thereof will go to the actual beneficiaries.
• The bank waives the requirement to take out life insurance: In this scenario the bank has decided that no life insurance is needed. It is then said that the bank has waived (dropped) the requirement for life insurance. This is most unlikely and the banks will furthermore insist on the borrower to sign a document confirming that the client understands the consequences of not taking out insurance.

Final note on life insurance and bonds:

1. When examining the policies in general, it pays to shop around. However, before signing it is essential to examine the small print carefully because seemingly excellent policies can contain tricky exclusion clauses which greatly reduce their value.
2. Similarly, certain pre-existing health conditions of which the insured may be completely unaware and which may not be picked up at his/her original health inspection can also nullify the payment if it is found later that these diseases were the cause of death.
3. Life insurance is mostly ceded to the mortgagee and, in some cases, the insurance policy is linked to the bond and falls away, without the insured realising it, after the bond is cancelled. This can also happen with fire and storm insurance. In these cases it is possible to keep the policy going even though the bond is paid up.