MONEY CLINIC | Can I cancel a home loan without incurring penalties?

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Cancelling a bond is an essential step in most property journeys, but it can feel overwhelming when you’re doing it for the first time. Don’t be afraid to ask for advice from your bond originator.
Cancelling a bond is an essential step in most property journeys, but it can feel overwhelming when you’re doing it for the first time. Don’t be afraid to ask for advice from your bond originator.

Cancelling a bond is often an inevitable part of home ownership, but if you have no idea how the process works, you’re not alone.

Leonard Kondowe, National Admin Hub Manager for Rawson Finance, explains the steps to follow, and shares tips on minimising costs and penalties along the way.

Step 1: Submit your notice of intent to cancel 

Unless your bond has reached the end of its term (normally 20 or 30 years), you're going to need to provide at least 90 days' written notice of your intent to cancel. Closing your bond before this notice period is up could incur penalty fees. (These are normally waived if the property is part of a deceased estate or has been sequestrated, or if you're taking out a new home loan with the same institution.)

"To avoid early termination penalties, it's always best to give notice to your lender as soon as you put your home on the market," says Kondowe.

"You can cover your bases even more thoroughly by including a clause in your sales contract that pauses registration – which triggers bond termination – until the conclusion of your 90-day notice period. That way, if you sell quickly and the transfer goes faster than normal, you won't end up having to foot an unexpected bill."

Kondowe warns that your notice of intention to cancel may expire if your property fails to sell quickly. In this case, you'll need to resubmit and start the process all over again. 

"Expiration dates vary by institution," he says. "Some expire immediately at the end of their 90-day period, while others remain valid for as long as 6 months."

Good to know: Bonds cancelled very early – typically within a year or two of a purchase – could be subject to an additional 1% penalty on the outstanding bond amount. If you absolutely have to sell this early in your ownership period, Kondowe suggests asking your bond originator to negotiate this fee with your lender if at all possible.

Step 2: Request cancellation figures 

Providing notice of intent to cancel a bond doesn’t actually trigger the cancellation process. This only happens when your conveyancer (or cancellation attorney) is instructed to request your cancellation figures.

This can happen at a time of your choosing if you’re closing your loan account of your own accord, or as soon as your property sells if it’s on the market. 

Step 3: Settle any outstanding amounts 

Your lender will provide cancellation (or settlement) figures to your conveyancer. These show exactly how much you’ll need to pay to settle your remaining debt. If you’re cancelling your bond without selling your property, you’ll need to pay this out of pocket.

 If you are selling, this will be paid automatically from the proceeds of your sale as part of the transfer process.

"Remember, lenders do charge interest on your outstanding balance from the date settlement figures are provided to the date the payment is received and the bond is officially cancelled," says Kondowe.

"This is unlikely to be much more than you would be paying on your bond anyway, so it shouldn’t be an additional financial burden, but it could cause some confusion if the final settlement figure differs slightly from the original figure provided."

Important: If your Home Owners’ Comprehensive (HOC) insurance is debited from your home loan account, you’ll need to transfer the debit order to a different account before your bond is cancelled. Failure to do so could cause your insurance cover to lapse, leaving you in a sticky situation if anything goes wrong.

Step 4: Pay cancellation fees 

Lenders don’t normally charge bond cancellation fees other than (avoidable) penalties for early termination. However, you will need to pay the cancellation attorney for their services, even if your bond was fully paid up. (These fees may be included in the settlement figure provided by your lender if they contracted the cancellation attorney on your behalf.)

"It’s important to be aware that this cost is not part of the transfer fees covered by the buyer," says Kondowe. "Bond cancellation fees are solely for the seller’s – or bondholder’s – account."

Cancelling a bond is an essential step in most property journeys, but it can feel overwhelming when you’re doing it for the first time. Don’t be afraid to ask for advice from your bond originator, who can help you streamline the process and minimise fees and penalties while sourcing new finance options for your next property adventure.  

Questions may be edited for brevity and clarity.

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