This week our panel of experts considers the important issue of the insurance requirements with regard to mortgage bonds.
A reader would like to know whether it is compulsory for a bondholder to take out life insurance when a bond is registered in his or her name.
She also asks what would happen if a bondholder were to die without any life assurance. The question is whether there is negligence on the part of the bank for not insisting on life assurance.
Lucille Geldenhuys from Lucille Geldenhuys Attorneys in Stellenbosch says the Long-term Insurance Act of 1988 protects consumers from so-called “provisional selling”, also known as “conditional selling”.
A typical example of this, says Geldenhuys, would be when a bank refuses to grant a bond over a fixed property unless the mortgagor takes out additional life assurance.
“Section 44(1a) of the Act states that if a party to a loan agreement requires that a long-term policy or its benefits be made available and used to protect the interests of a creditor, then that person who must provide the security is entitled to be given prior written notification of his or her choice to use an existing policy with an appropriate value or to take out a new policy, or a combination of both.”
Geldenhuys says if the mortgagor already has sufficient cover in place, this can be utilised to satisfy the bank’s requirements. “Alternatively, if additional cover is required, the mortgagor can approach the provider of his or her choice.
“Generally, the bank must consider various issues when assessing the bond application, such as whether the potential mortgagor can afford the bond repayments, as envisaged by the National Credit Act.”
It should also evaluate whether the fixed property over which the bond is to be granted is sufficient security in terms of the amount requested, says Geldenhuys.
“The latter is a very important aspect in light of the reader’s question,” says Schalk van der Merwe from Rawson Properties Helderberg. “In the event of the death of the mortgagor, the bank as bondholder ranks as a secured creditor when it comes to the outstanding amount on the bonded property.”
In other words, unless the outstanding bond can be paid from, for example, the proceeds of a life policy, the bank can have the property sold to settle the outstanding amount, says Van der Merwe.
“In practice, what may happen is that the property falls into the deceased estate along with all the other assets owned by the deceased at the time of his or her death.”
Van der Merwe says the executor of the estate will be able to establish who the beneficiary of the property is and whether there is sufficient cash in the estate from which to settle the outstanding bond.
According to Van der Merwe, the beneficiary may choose to register a new bond over the property, thereby negating the balance owed and cancelling the existing bond. “In this way, the property does not have to be sold.”
As much as life cover may be a convenient way of ensuring that the outstanding balance on a bond is settled in the event of the mortgagor’s death, Van der Merwe says it is certainly not a requirement for the bank to grant the bond.