New Interest Rates after transferring loans out of a Juristic entity


Many of you will be aware that in terms of our amended laws of taxation it is cheaper to have your property in your personal name, than in the name of a juristic entity (such as a company or a trust). Specifically there is a much bigger rebate if the property is held in your own name for Capital Gains Tax than if it is held in the name of a juristic entity.

Unsurprisingly due to this change many people have been transferring their properties out of the name of the juristic entity and into their own personal name. While this is well known, what is perhaps less well known is that it appears that some of the banks have been capitalising on this practice. Essentially what occurs is that when the property is transferred from (for example) a Trust to Joe Soap, the bank is forced to enter into a new loan with Joe Soap and cancel the loan with the Trust. Obviously the old bond must also be cancelled and a new bond registered. So far so good. However what many home owners don't realise is that when the new loan is advanced by the bank, in many cases the interest rate that the bank includes is in excess of the previous interest rate under the old loan.

For example if the interest rate was 8% when the property was owned by the Trust, the bank now refuses to advance the self-same loan amount to the private individual at the rate of 8%, but rather requires that he agree to a new interest rate of 10%. What makes this practice particuarly unfortunate for the consumer is that there is no obvious solution for this problem in terms of the National Credit Act. In theory at least if the bank were to choose to increase the interest rate in this fashion the consumer would be free to refuse this increase and to shop around for a home loan that could be advanced on the same terms as he previously had. (It should be noted that in most cases the invidual signs surety (also known as credit guarantee) for the Juristic entity that obtains the loan, so in effect the security that the bank holds in both cases is in effect identical).

While we have some suggestions about possible approaches by consumers to deal with this issue, it is difficult not to conclude that the banks are taking advantage of the change in Capital Gains Tax to maximise their profit and obtain a bigger return than they otherwise would have received had the original loan continued.

We have been speaking to various parties regarding this practice and we anticipate that this issue will receive some significant media attention soon. Should you have come across this practice we would be interested to hear from you and provide you with some assistance.

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