Purchasing immovable property is a significant step to take for any South African, and one that remains a positive investment. And while there is much said about the risks and considerations property buyers should bear in mind to protect themselves, there are also risks involved for other parties in the process.
In particular, when it comes to a home loan or mortgage, the reality is that the financial institution is entering into an agreement with significant risk due to the vast sums involved. Should the buyer not be able to repay the loan, the financial institution is forced to call on its bond and recover its loan through a process of foreclosure.
However, what happens in a situation where a property that is still bonded is destroyed or damaged? Such a disaster has significant implications on both the buyer as well as the financial institution that funded the property purchase: the buyer remains indebted to repay a loan for a property that no longer exists, and should the buyer not be able to repay the loan, the physical collateral of the property no longer exists to cover the outstanding loan.
To manage this risk, and offer security to both parties to a loan agreement, financial institutions will typically require a buyer to take out homeowners insurance before approving a bond application.
This insurance, different to home contents insurance, covers the property itself from damage or destruction. Should the property be damaged or destroyed by an event such as a fire or a flood, the value of the property will be paid out by this insurance policy, which can then be used in order to repay the outstanding home loan.
It is worth noting, though, that different financial institutions’ requirements may vary. As such, it is always advisable to find out the details relating to home loan requirements from the relevant institution to ensure the appropriate steps are taken and the necessary documentation is compiled for the bond application.
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