What happens to your home loan when the unforeseen happens?

Unforeseen life events like divorce, the death of a loved one, financial challenges, or a new partnership can turn even the most stable home loan into a stressful situation. Navigating a home loan under these conditions can be challenging, but understanding your options can help you make informed decisions and avoid unnecessary financial strain.

Here’s what you need to know if you face one of these circumstances:

1. Divorce and your home loan

Divorce is one of the most common unforeseen life events that impact home loans. If a home loan is in both spouses' names, they have a few options:

• Selling the property: This is often the most straightforward approach. Selling the home allows you to use the proceeds to settle the outstanding balance and split the remaining amount, if any, between the two of you.
• Transferring the home loan to one partner: If one spouse wants to keep the home and can afford to take over the entire loan, they may apply to the bank for a “substitution of debtor.” Section 57 of the Deeds Registries Act allows for this transfer of debt, allowing one partner to fully take on the financial responsibility for the home loan. The bank will need to assess the remaining partner’s financial stability and creditworthiness.
• Maintaining joint ownership: Although less common, some couples agree to keep the home as joint property, with both contributing to the loan. This approach works best when both parties can cooperate on mortgage payments and property management.

In all cases, it’s important to communicate with your lender early in the process, as they will likely require proof of your ability to afford the loan if you’re taking over the property alone.

2. What happens to a home loan when a partner passes away?

Losing a partner is difficult, and dealing with home loan concerns can feel overwhelming. Fortunately, there are options to help you manage the home loan and, if desired, keep the property in the family.

• Mortgage protection insurance: Many home loans come with mortgage protection insurance, which can pay off the remaining loan balance if one partner passes away. This option often ensures that the surviving partner or family can keep the property without the added financial burden of repaying the loan.
• Substitution of debtor for heirs: If there is no insurance and the property is intended to stay within the family, the surviving partner or heirs can request a substitution of debtor. Section 57 allows them to take over the outstanding home loan rather than settle it immediately, keeping the property intact without the immediate financial burden. This process requires the heir(s) to undergo a creditworthiness check and may involve reassessing the property’s value.
• Handling through the estate: If the loan is not covered by insurance and the estate doesn’t have enough funds to settle it, the property may be sold to repay the outstanding balance. The bank will generally work with the family to find a solution that minimizes disruption, but if no arrangement is made, they may initiate foreclosure.

The lender’s requirements may vary, so it’s wise to seek advice from both a financial advisor and a legal expert to ensure you’re well-prepared.

3. How financial changes can impact your home loan

Changes in income, whether due to a job loss, business failure, or unexpected expense, can make it challenging to keep up with home loan payments. Fortunately, South African lenders offer several options to help:

• Restructuring the loan: Homeowners facing long-term financial difficulties may consider restructuring their loans to reduce monthly payments. This often means extending the loan term, which lowers the monthly amount but can increase interest over time.
• Requesting a payment holiday: Many banks allow clients to pause or reduce their home loan payments temporarily if they’re struggling financially. This option, known as a payment holiday, can be a helpful short-term solution, though interest may continue to accumulate.
• Adding a new debtor: Under Section 57, an additional debtor can be added to help meet payment requirements. Adding someone, like a family member or trusted friend, to the loan can help share the financial responsibility. The new debtor will need to meet the bank’s financial standards, so their creditworthiness and income level will be assessed.

If you foresee financial challenges, reach out to your lender early, as they’ll be more flexible if you communicate before missing payments.

4. Adding a new partner to your home loan

When moving forward in life with a new partner, many homeowners wish to add them to the home loan and property title. This is possible under Section 45(bis) of the Deeds Registries Act, which allows for a substitution of debtor in certain situations. Adding a new partner to a home loan involves several steps:

• Application process: To add a partner, apply to the bank and have your new partner’s financial information and creditworthiness reviewed. If approved, they will be added as a co-debtor, which means both of you share responsibility for the home loan.
• Considerations for ownership: Adding a partner also involves updating the title deed to reflect joint ownership. Although it involves legal and registration fees, this transfer is often less costly than a traditional property transfer, as the bank’s attorneys usually handle the paperwork.

This substitution of debtor process is especially useful for couples who want to share property ownership without transferring or selling the home outright.

Applying for Substitution of Debt: The essentials

The substitution of debtor process requires an application to the bank holding the home loan, and a few other key steps:

1. Apply in writing: Write to your bank to request substitution of debtor. The bank will review the application and assess the new debtor’s financial profile.
2. New debtor assessment: The bank will check the new debtor’s credit and finances to ensure they can manage the loan repayments.
3. Property valuation: The bank may ask for a property revaluation, which can help with refinancing the loan at a lower rate if the outstanding balance is significantly reduced.
4. Title deed transfer: Once approved, the title deed is transferred to the new debtor, along with necessary legal and registration fees. These costs are usually less than those associated with a standard property purchase.

When section 57 does not apply

• When only a portion of the land under a bond is being transferred.
• When the home loan is a surety bond, meaning someone else agreed to pay if the debtor defaults.
• If the bank holding the home loan rejects the application.
• If the seller is a trustee of an insolvent estate, or an executor administering an estate on behalf of a company being wound up.

Before marriage: understanding your marital contract

The way you marry affects how debt substitution will work in case of divorce:

• Community of property: All debt is shared, so substitution of debtor allows one spouse to take over the entire home loan.
• Out of community of property: Substitution of debtor allows the property and debt to transfer to one spouse, if they wish to keep the house.

What to do if Substitution of Debt is denied

If the bank rejects the substitution of debt, the remaining option is to cancel the existing home loan and apply for a new one. This involves typical property purchase fees like transfer duties and attorney costs. It’s more involved than a substitution, but it may be the only option for transferring property in some cases.