Real Estate Investor Magazine South Africa December / Jan 2016 | Page 24

BONDS

What is a Mortgage Bond
And how does it help you?
BY HARRY FRIEDLAND

I

t’s part of South African “property-speak”: “I need a
bond”; “I’m getting a bond”; “I got a bond” – we all
know what we mean by that, but when we say these
things, what is actually going on?
A “bond” is a burden placed on land to secure a debt
owed by the owner of the land. It ensures that the
owner cannot do anything that affects the land without
the cooperation of the “bond holder” (usually, but not
exclusively, a lending bank). The bond itself is the end
result of a loan agreement between a borrower and a
lender – it is not the loan agreement itself. The loan
agreement is a separate contract whereby a lender lends
money to a borrower. The loan agreement and the bond
are usually signed simultaneously and it may happen that
the person who supervises the signing on behalf of the
lender may not point out the distinction between the two,
so just bear that in mind. So:
•“I need a bond” = “I need money”;
•“I’m getting a bond” = “I am applying for a loan which
will be secured by immovable property”
•“I got a bond” = “I am borrowing money (usually, but
not exclusively, from a lending bank)...
Lenders assess the risk of lending to their borrowers very
carefully and that risk is made up of various factors beyond
merely the borrower’s age, income and prior commercial

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DEC/JAN 2016 SA Real Estate Investor

behaviour, including, most importantly, the borrower’s
ability to disappear with the security for the loan – but
in the case of immovable property, no borrower has ever
managed to disappear with the security!
Furthermore, the lender’s attitude to and assessment of
the risk reflects in the interest charged on the loan – so of
all the types credit agreements, mortgage bonds always
have the lowest interest rate: the interest rate is always
a gauge which shows the lender’s attitude to the level of
risk of the transaction. You will even find that within the
spectrum of interest rates charged by lenders to different
borrowers at any given time, first time borrowers, lowerincome borrowers and borrowers with a lower level of
education are invariably charged a higher interest rate
than buyers with a lower risk profile. Of course, the ratio
of debt to the value of the property also affects the interest
rate.
Where a borrower goes back to his lender in a series
of successive loan arrangements, all secured by the same
property, the rate of interest charged on the overall loan
may go up as the relative amount of equity in the property
goes down. This calculation is complicated by the fact that
the value of the property fluctuates according to inflation,
changing usage and the nature of its location over the
years – but these factors do not necessarily cancel each
other out (witnessed by the fact that there is a different
CPI for properties, separated out from an overall CPI for
the national economy as a whole).
We witnessed the effect of an incorrect assessment
www.reimag.co.za