Answer to a question from a reader

Can the bank demand twice the monthly repayment of a loan on an over-insured house?

The short answer

The in duplum rule limits all interest and other payments on debt to double the amount of the original debt.

The whole question

Dear Athalie

My house has been over-insured. Is the bank allowed to demand R15,000 instead of R8,000 monthly payments on a loan of R800,000? How can the in duplum rule be interpreted?

The long answer

In the first place, let’s just look at what underinsured and over-insured means:

Under-insurance* occurs where the sum insured is less than the amount of the loss that the insured would suffer if the risk should materialise. (In other words, the sum insured is less than it will cost you to rebuild your house.) For example, a house is insured for R100,000, but its market value is R150,000. A person in such circumstances may only recover loss

  • that is actually suffered; and

  • up to the sum that is insured.

Over-insurance* occurs when the sum insured is greater than the loss that the insured would suffer if the risk materialises. For example, a house is insured for R200,000, but its market value is R150,000. Even here, the insured may not recover more than the loss he actually suffers. (*Definitions taken from Wikipedia.)

The bank requires you to have building insurance in place before they will agree to finance a bond. This is to cover structural damage caused by fire, storms, burst geysers or theft. But the bank cannot require you to take out the insurance that it chooses. It is illegal in terms of the Financial Advisory and Intermediary Services (FAIS) Act to force a customer to buy a particular insurance policy when the customer is taking out a home loan. The bank is legally required to tell you that you can choose your own insurer. If you choose another insurer, you need to provide the bank with proof that you have building insurance in place.

However, the banks have been known to simply hide the purchase of the insurance in the fine print of the home loan agreement without informing customers of their right to shop around and find the best insurance deal. The customer does not know she has a right to choose, and ends up paying for the insurance policies which the bank has chosen, which may well be more expensive. 

Perhaps the first thing to do is to check your home loan agreement and see if you signed up for a building insurance policy you did not choose, bearing in mind that the FAIS Act says the banks must give you a competitive choice of insurance policies. If you were not given a chance to investigate alternative quotes, you may have grounds to claim a refund of the insurance premiums that you have paid.

Lawyer Leonard Benjamin, who has a background in insurance, says that many South Africans have fallen into default on their home loans because they were sold unaffordable and inappropriate insurance. It may be that the insurance policies hidden in the home loan are causing them to fall into default with their home loans. He advises that you should:

  • get a comparative quote. You cannot be forced to stay with an insurance policy if you can find a cheaper one. If you find a more competitive quote, tell the bank to stop deducting the insurance from your home loan account. 

  • if the insurance is being charged to your home loan account, check that the payment is being taken as part of the home loan payment. If you are paying regular instalments and the home loan amount is going up, you must get the bank to investigate because the home loan account may be being incorrectly administered. If it is, the bank must correct its mistake and pay back any monies owing to this mistake. 

The banks are also obliged in terms of the National Credit Act (NCA) to investigate whether you can afford the loan you request, and to explain what the terms of the loan are and what you will be expected to pay. The bank must carry out a pre-credit assessment. If it goes ahead with a loan despite knowing that the consumer did not have a good enough credit record and was unlikely to be able to meet the payments, and, in terms of Section 80 and 81 the NCA,

  1. the consumer did not generally understand or appreciate the consumer's risks, costs or obligations under the proposed credit agreement; or

  2. entering into that credit agreement would make the consumer over-indebted

the bank could be found guilty of reckless lending. But the onus is on the customer to prove that the bank was guilty of reckless lending. The customer is also obliged to give truthful answers to the bank when they conduct their pre-credit assessment. If the customer is found to have been dishonest, the bank will not be found guilty of reckless lending.

If you are behind in your home loan payments, the statutory in duplum rule (Section 103(5) of the NCA) applies: this limits all interest and other payments on debt to double the amount of the original debt. This kicks in from when you are in default with your debt. So, for example, if you borrowed R1,000 and have fallen into default with your payment, you cannot be charged more than R2,000, which is double the amount of your original debt.

Section 103 (5) of the NCA applies to all credit agreements under the NCA including banks, motor vehicle and asset finance companies. It also applies to insurance fees. You can’t be charged more in interest than your original debt. If other charges are added to the interest, you still can’t be charged more than double the original amount borrowed.

This was confirmed by the Western Cape High Court in 2019 when the Stellenbosch University Law Clinic and Summit won the case they had brought against the credit providers who were charging their clients for collection and legal fees way over double the amount they owed on their original debt. 

You could ask for advice and assistance from the University of Western Cape Law Clinic: 

Tel: 021 959 2756 (they are only taking telephone calls now as their offices are closed due to Covid-19.)

Wishing you the best,

Answered on June 22, 2021, 1:56 p.m.

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