Early
settlement clauses in your bond terms and conditions can be a contentious issue.
Early settlement is settling the bond before the maturity date of the bond. Selling
your property before the maturity date is however also seen as early settlement by some financial institutions.
This means that you have an additional fee over and above fees e.g estate agent
fees that you may have forgotten about and have not included in your
calculations when selling your property.
This may
not sound as a big deal but lets look at the following calculations:
Some financial
institutions include an early settlement fee of up to 5% in there terms and
conditions.
If the
building was purchased for R 20 million the bank would provide a 50% LTV (Loan
to value) over the property. This means that 50% is covered by a bond and the
other 50% is self-financed.
Let’s take
the scenario (for illustrative purposes) where the building is sold within 3
months after purchase for a profit of R 2 million.
The
property is thus sold for R 22 million.
Sales
Commission of 4% (for illustrative purposes only) is calculated at R
880 000.
The 5% on
the outstanding bond for early settlement is R 500 000 if we use R 10 M as
the outstanding bond. (Over a three month period the amount allocated to
capital is minimal)
The cost of
sale is thus R 500 000 + R 880 000 = R 1380 000 which amounts to 6.3%
of the total sale value.
Under normal
conditions the seller would need to negotiate the sales agent commission as a
direct cost for the sale of the property. If you have an early settlement fee
then you may not have calculated that into your expenses and if your profit was
lower you may end up incurring a loss.
It is thus
vital that you check your bond terms and conditions to establish whether you
have an early settlement fee and bring that into your calculations since the
selling of your property is seen as early settlement.
The Nethold Group
