The Three Months' Interest Most People Pay for Nothing When They Sell

Somewhere in the process of selling a house, an attorney will ask whether you have given your lender notice that you intend to settle the bond. People say yes, or no, or they are not sure, and the conversation moves on.

That question is worth tens of thousands of rands.

Not because the law obliges you to give notice — it does not. Because the amount your lender may charge you for settling early is calculated from the notice you gave. Give the full three months and the charge falls away entirely. Give none and you can pay three months of interest on a home loan you no longer have.

What the law actually says

Two provisions do the work, and neither says what most people think.

First, you are entitled to settle a credit agreement at any time, with or without advance notice. Nobody can refuse to let you settle, and failing to give notice is not a breach of anything.

Second, the settlement amount is made up of three things: the unpaid balance of the principal debt; the unpaid interest, fees and charges up to the settlement date; and — for a large agreement — an early termination charge.

A home loan is a large agreement. The Act says a credit agreement is a large agreement if it is a mortgage agreement, and that classification does not depend on the size of the bond. So the early termination charge is in play on every home loan.

The charge is a subtraction, not a penalty

Here is the provision that matters, and its structure is the whole point.

On an agreement that is not at a fixed rate — which describes most South African bonds — the early termination charge may be no more than the interest that would have been payable for a period equal to the difference between three months and the period of notice of settlement, if any, given by the consumer.

Read it as arithmetic rather than as a rule:

Charge = interest for (three months − notice you gave)

So the notice period is not an obligation with a penalty attached. It is a subtraction from a charge that starts at three months' interest and shrinks as you give notice.

That framing changes what you do about it. You are not trying to comply with a deadline. You are trying to start a clock as early as possible, because every month of notice removes a month of interest.

What that is worth in rands

Take a bond with R1,500,000 outstanding, at an illustrative rate of 10.5% a year. That is roughly R13,125 of interest a month.

• No notice given — up to R39,375.
• One month's notice — up to R26,250.
• Two months' notice — up to R13,125.
• Three months' notice — R0.

The rate above is an illustration, not a claim about your rate or the current prime rate; use your own figures. But the shape holds at any rate: the sum you save is three months of interest on your outstanding balance, and it is available for the cost of sending a letter.

For a larger bond the numbers are correspondingly larger. This is one of the few costs in a property transaction that you can reduce to zero by acting early, and one of the most commonly forfeited.

When to give notice

The practical difficulty is that the three months runs from your notice, not from the sale — and most people only think about the bond once an offer has been accepted, by which time transfer may be less than three months away.

So the right moment to give notice is when you decide to sell, not when you find a buyer. Notice of intention to settle is not a commitment to sell to anyone in particular, and it costs you nothing to have the clock running.

If you are refinancing or moving your bond to another lender rather than selling, the same charge applies to settling the existing agreement — so the same notice logic applies. Our guides on refinancing and how to refinance a home or car loan cover that decision; this is the cost to build into it.

If you gave notice and the sale then takes longer than expected, ask your lender what happens to the notice rather than assuming it lapses.

Reading the settlement quotation

When the quotation arrives, it should reduce to the three components the Act lists, and it is worth separating them yourself rather than accepting a single total.

The unpaid balance of the principal debt. What you still owe on the loan itself.

Unpaid interest, fees and charges to the settlement date. Interest accrues until the money actually reaches the lender, so a quotation is usually valid only to a stated date — settle after it and the figure changes.

Any early termination charge. This is the one to test against the arithmetic above. If you gave two months' notice, the charge should not exceed one month's interest on the outstanding balance.

If the quotation shows a single lump figure with no breakdown, ask for one. You are entitled to understand what you are being asked to pay, and the components are defined in the statute rather than left to the lender's discretion. A charge that cannot be explained by reference to your notice period is the one to query in writing, before you pay it rather than after.

Paying extra is always free

A separate provision removes a worry people often carry into this.

At any time, without notice or penalty, a consumer may prepay any amount owed under a credit agreement.

So putting a bonus, a tax refund or a lump sum into your bond carries no notice requirement and no penalty, ever. The notice question arises only when you settle the agreement — that is, pay it off and end it. Prepayment and settlement are different things, and only the second one interacts with the three-month charge.

That distinction is worth keeping straight, because the fear of a penalty stops people from making extra payments that would save far more than the charge they are worried about. Our bond extra payment calculator shows what those payments actually do to the term and the total interest.

Where your payments go

One more provision worth knowing, because it explains why a bond balance moves more slowly than people expect in the early years.

Each payment is credited firstly to any due or unpaid interest charges, secondly to any due or unpaid fees or charges, and thirdly to reduce the principal debt.

Interest and fees come off the top. Only what is left reduces what you owe. That is also why an extra payment made specifically against capital is worth more than the same money arriving late and being absorbed by arrear interest and charges first.

What to do

1. Give notice when you decide to sell, not when you accept an offer. Three months is the maximum the charge can reach and the maximum you can subtract.
2. Put it in writing and keep proof of the date. The date is the only thing that determines the size of the subtraction.
3. Ask for the settlement quotation and check its components against the three the Act lists — principal, interest and charges to date, and any early termination charge.
4. Query an early termination charge that exceeds the interest for the gap between three months and the notice you gave.
5. Do not confuse prepayment with settlement. Extra payments are free at any time.
6. Budget separately for bond cancellation costs. The attorney and deeds office side of cancelling the bond is a different cost from the s125 charge, and it does not disappear with notice.

If the property is jointly bonded and the sale follows a separation, divorce and the joint bond deals with that dimension, and our bond calculator and home loan comparison cover the financing side.

For everything else, start at our money guides.

Frequently asked questions

Am I legally required to give 90 days' notice before settling my bond? No. You are entitled to settle at any time, with or without advance notice. Notice reduces what you can be charged; it is not a condition of settling.

What can the lender charge me for settling early? On a home loan that is not at a fixed rate, an early termination charge of no more than the interest that would have been payable for the difference between three months and the notice you gave.

So if I give three months' notice, there is no charge? The difference between three months and three months is zero, so there is nothing to charge on that basis. You still owe the outstanding balance and the interest and fees up to the settlement date.

What if my loan is at a fixed rate? The Act provides for a prescribed charge in that case, or, if one has not been prescribed, a charge calculated the same way as for variable-rate agreements. Ask your lender to show you how it arrived at the figure.

Does this apply to a car loan? The early termination charge applies to large agreements. A mortgage agreement is always one; other credit transactions qualify by size. Ask your lender to confirm the classification of your specific agreement.

Can I be penalised for paying extra into my bond? No. At any time, without notice or penalty, you may prepay any amount owed. Extra payments are not settlement.

How is my monthly payment allocated? Firstly to due or unpaid interest, secondly to due or unpaid fees or charges, and thirdly to reducing the principal debt.

Is the early termination charge the same as bond cancellation costs? No. Cancelling the bond registration involves attorney and deeds office costs, which are separate from the early termination charge and are not affected by the notice you give.