What happens with the home loan during unforeseen circumstances?

Substitution of debtor is the process of switching the name on the home loan.

Getting divorced, dealing with a death in the family, or facing a change in financial circumstances? Perhaps your partner has passed away and the home loan that you’ve been contributing to is in their name. How can you change the name on the home loan?

The legal basis for this process is section 57 of the Deeds Registries Act, known as the substitution of debtor. This law allows for a home loan debtor to be replaced with a new debtor, and it is particularly relevant in the following circumstances:

• Divorce: When one spouse wishes to keep the property and the other wants to exit the financial obligation, the new debtor must take responsibility for the entire outstanding loan.
• Deceased estate: When the home loan debtor dies, heirs may use debt substitution to retain the property within the family, without needing to immediately settle the outstanding home loan.
• Joint home loan: When one partner wishes to transfer the ownership and the home loan debt to the other.
• Financial difficulties: Debt substitution can assist in restructuring debt by adding an additional debtor.

Section 45(bis) and substitution of debtor

Another relevant section of the Deeds Registries Act is section 45(bis), which allows for a substitution of debtor in cases such as when an owner marries and wishes to add their new spouse to the existing home loan, or simply add another person to the loan.

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.

How to apply for a substitution of debt

• Apply to the bank holding the home loan, in writing, to seek approval for transferring the debt to a new or single debtor.
• The new debtor will be assessed for affordability and creditworthiness, including a credit check to ensure they can manage the loan repayments.
• The property may need to be revalued, which is beneficial, especially if a large portion of the loan has been paid off. The new debtor may want to refinance at a lower interest rate.
• The title deed will need to be transferred to the new owner, along with legal and registration costs. These are generally cheaper than standard property transfers. The bank’s attorneys usually handle this process.

What if the substitution of debt is rejected?

If the substitution is rejected, the only alternative is to cancel the existing home loan and apply for a new one in the new debtor's name. This process incurs all the usual costs associated with purchasing a new home.