Bond recapitalisation calculator

[Jehosefat]

Thanks, yeah I gather that's what happens when it's fully paid off. The monthly fee is to keep the facility open.

Dumping this lumpsum in there brings it down from 16 years to just over 6 years. But technically it would be paid off in 4.5 years when the reserve balance = loan balance.

View attachment 1857072

What tripped me up was my reserve balance decreasing without drawing anything from it...

Your reserve balance will amortize down over the term of the loan as well. It is necessary to be NCA compliant for the bank. Otherwise you could be, say, R1m in advance the day before the loan matures and withdraw the entire R1m and then you would owe it back the next day which would breach the "max instalment of 30% of gross income" rule. So effectively your reserve balance will be equal to the theoretical amortized value/outstanding balance at this point in time (i.e. assuming you've made no additional payments) minus your actual outstanding balance.

Practically, what I've seen happen is that the available balance will decrease by the full instalment on the payment date but increase back up to the correctly amortised value a few days later. e.g. will drop from R1m to R980k then will go back up to R998k a few days later.

 

[Mike Hoxbig]

Your reserve balance will amortize down over the term of the loan as well. It is necessary to be NCA compliant for the bank. Otherwise you could be, say, R1m in advance the day before the loan matures and withdraw the entire R1m and then you would owe it back the next day which would breach the "max instalment of 30% of gross income" rule. So effectively your reserve balance will be equal to the theoretical amortized value/outstanding balance at this point in time (i.e. assuming you've made no additional payments) minus your actual outstanding balance.

Practically, what I've seen happen is that the available balance will decrease by the full instalment on the payment date but increase back up to the correctly amortised value a few days later. e.g. will drop from R1m to R980k then will go back up to R998k a few days later.

I assume this is probably how it works with Standard Bank, where you have the option to reduce the installment but keep the term the same. A portion of your prepaid funds is capitalised, to prevent the installment from increasing too much when you withdraw from your prepaid funds. Because this is where there's a possibility to withdraw the entire amount the day before your 20 years is up, and you owe the full amount the next day.

With FNB you don't have this option. Your installment stays the same but your term reduces. Your installment has the effect of reducing more of the capital balance, so you pay less interest. This means you should be able to withdraw the full R1m, because your installment remains the same. But you would have benefitted from paying less interest and reducing more of the capital balance while the R1m was in there.

I think I remember this happening with my previous bond. They hold a certain amount of your prepaid funds back after the debit order, in case the debit order bounces or something. But they restore it back after 5-7 days. Was drawing a blank when this confused me earlier...

 

[Jehosefat]

With FNB you don't have this option. Your installment stays the same but your term reduces. Your installment has the effect of reducing more of the capital balance, so you pay less interest. This means you should be able to withdraw the full R1m, because your installment remains the same. But you would have benefitted from paying less interest and reducing more of the capital balance while the R1m was in there.

The term doesn't reduce though. The contractual term (i.e. how long the bank will keep the bond open for) remains the same. Practically though you will pay the balance down to zero earlier with your prepaid amount being accessible until you either ask them to close the account or it reaches the contractual term. Even in this case the available amount will also amortise down until it reaches zero at the contractual end date because of the aforementioned NCA compliance requirement.

 

[Mike Hoxbig]

The term doesn't reduce though. The contractual term (i.e. how long the bank will keep the bond open for) remains the same. Practically though you will pay the balance down to zero earlier with your prepaid amount being accessible until you either ask them to close the account or it reaches the contractual term. Even in this case the available amount will also amortise down until it reaches zero at the contractual end date because of the aforementioned NCA compliance requirement.

As an example, here's how the rest of that picture looks.



By month 77 the principal debt would be paid. You now owe the bank nothing. The reserve balance of R230k is in effect what you can draw as a loan over the remaining term. I'm assuming that you can draw as much as you want, as long as there's enough time left to repay the loan over your remaining term, using the installment that you would have paid.

So in month 239, the most you would be able to draw is R22k, to cover your installment for the last month. So you would be able to draw the full R230k up to 11 months (11 x R22k = R242k) before your bond's term ends. Maybe a few more months depending on what the interest would be.

If I leave the full R1m without drawing out R10k every month, the principal debt would go to 0 sooner and I should have access to the full R1m. But I would only have access to the full R1m up to the point where there's enough time left to pay it off over the remaining term at the contracted installment. The installment will always be what it is at any point in time, because FNB calculates it on the full loan amount, not the available amount.

Or am I smoking something?

 

[Jehosefat]

As an example, here's how the rest of that picture looks.

View attachment 1857184

By month 77 the principal debt would be paid. You now owe the bank nothing. The reserve balance of R230k is in effect what you can draw as a loan over the remaining term. I'm assuming that you can draw as much as you want, as long as there's enough time left to repay the loan over your remaining term, using the installment that you would have paid.

So in month 239, the most you would be able to draw is R22k, to cover your installment for the last month. So you would be able to draw the full R230k up to 11 months (11 x R22k = R242k) before your bond's term ends. Maybe a few more months depending on what the interest would be.

If I leave the full R1m without drawing out R10k every month, the principal debt would go to 0 sooner and I should have access to the full R1m. But I would only have access to the full R1m up to the point where there's enough time left to pay it off over the remaining term at the contracted installment. The installment will always be what it is at any point in time, because FNB calculates it on the full loan amount, not the available amount.

Or am I smoking something?

Ok, yeah, I think we've kinda been saying the same thing. So your available amount could stay the same until you get close enough to the end of the loan that you could not repay that full value at the contracted instalment. At which point your available balance would start to amortise, reaching 0 at the maturity of the loan.

 

[Mike Hoxbig]

An update, as I suspected they deduct part of the installment from your prepaid funds to cover the installment in case the debit order bounces.

Got the money back within 7 days of the debit order. But what's interesting is there's now an extra R5k or so added to the available balance. Have no idea how any of this works anymore, but as long as I'm not losing money then I'm not complaining...

 

[zerocool2009]

An update, as I suspected they deduct part of the installment from your prepaid funds to cover the installment in case the debit order bounces.

Got the money back within 7 days of the debit order. But what's interesting is there's now an extra R5k or so added to the available balance. Have no idea how any of this works anymore, but as long as I'm not losing money then I'm not complaining...

After 7 days of the debit order, you can borrow against that again.

 

[Mike Hoxbig]

Plot twist, the amount that I withdrew (R10k) now increased the capital balance by the same amount. This basically negates any benefit in having money available. No idea wtf is happening at this point, it doesn't make any sense...

 

[Ninja'd]

No idea wtf is happening at this point, it doesn't make any sense...

As a non-homeowner, I felt like this since the start of the thread.

 

[Sepeng]

Plot twist, the amount that I withdrew (R10k) now increased the capital balance by the same amount. This basically negates any benefit in having money available. No idea wtf is happening at this point, it doesn't make any sense...

I haven't followed the thread but you with FNB by any chance?
Had/ have bonds with ABSA, Standard Bank and FNB, FNB by far the worst in terms of ease of understanding on the bond stuff.
ABSA the best - they keep it very simple, things seem to happen quicker. FNB it's like they try to get too clever.

 

[RedViking]

Plot twist, the amount that I withdrew (R10k) now increased the capital balance by the same amount. This basically negates any benefit in having money available. No idea wtf is happening at this point, it doesn't make any sense...

Tax and Mortgages should be taught in high school. It's stupid that it is still not mandatory part of the school curriculum.

 

[Mike Hoxbig]

Tax and Mortgages should be taught in high school. It's stupid that it is still not mandatory part of the school curriculum.

Tax is easy. The f-up with mortgages is each bank seems to handle it differently, so it's hard to factor in any assumptions into your calculations. Instead of just looking at interest rates (which is what most people look at), there needs to be more transparency on how flexi facilities are managed...

 

[RedViking]

Tax is easy. The f-up with mortgages is each bank seems to handle it differently, so it's hard to factor in any assumptions into your calculations. Instead of just looking at interest rates (which is what most people look at), there needs to be more transparency on how flexi facilities are managed...

It could also just be confusion. The way I understand it (I am not a home owner yet, but trying to do my homework), the more money you have in there the more your interest over time will reduce. If you take money out again, interest will increase again accordingly.

 

[Mike Hoxbig]

It could also just be confusion. The way I understand it (I am not a home owner yet, but trying to do my homework), the more money you have in there the more your interest over time will reduce. If you take money out again, interest will increase again accordingly.

No, because interest is calculated upfront, the way it should work is that a larger portion of your installment would go towards reducing the capital amount.

If you're drawing R10k from a reserve of R1m, that's only 1%. The impact on the amount of the interest portion allocated from the installment should be minimal.

In FNB's case it seems like your withdrawal reduces your reserve while also increasing your capital balance by the same amount, negating any benefit from having a larger portion of your installment being allocated to reducing the capital balance.

It maybe worth mentioning that I did the withdrawal after the debit order had gone off, not sure how much of a difference this makes...

 

[Jehosefat]

No, because interest is calculated upfront, the way it should work is that a larger portion of your installment would go towards reducing the capital amount.

If you're drawing R10k from a reserve of R1m, that's only 1%. The impact on the amount of the interest portion allocated from the installment should be minimal.

In FNB's case it seems like your withdrawal reduces your reserve while also increasing your capital balance by the same amount, negating any benefit from having a larger portion of your installment being allocated to reducing the capital balance.

It maybe worth mentioning that I did the withdrawal after the debit order had gone off, not sure how much of a difference this makes...

Interest on mortgages is not calculated up front. It's calculated daily on the outstanding balance (i.e. the capital amount) and capitalised monthly. So any additional payments you make into the bond will increase the proportion of the installment that goes towards the capital amount because the addition payment reduces the outstanding balance directly.

Yes, your withdrawal from the reserve HAS to increase the capital amount because that is the amount you currently owe the bank (and what the interest is calculated on). Your "reserve" is literally just an indication of how much you have paid in over and above the required amount that the flexi facility allows you to withdraw.

 

[Mike Hoxbig]

Interest on mortgages is not calculated up front. It's calculated daily on the outstanding balance (i.e. the capital amount) and capitalised monthly. So any additional payments you make into the bond will increase the proportion of the installment that goes towards the capital amount because the addition payment reduces the outstanding balance directly.

Yes, your withdrawal from the reserve HAS to increase the capital amount because that is the amount you currently owe the bank (and what the interest is calculated on). Your "reserve" is literally just an indication of how much you have paid in over and above the required amount that the flexi facility allows you to withdraw.

So the only way to get any benefit is to either capitalise it (to reduce the installment), or leave it untouched (to reduce the term)? Withdrawing negates any benefit?

 

[Jehosefat]

So the only way to get any benefit is to either capitalise it (to reduce the installment), or leave it untouched (to reduce the term)? Withdrawing negates any benefit?

It automatically reduces your outstanding balance as soon as you pay it in which will consequently mean you pay less interest in each installment (and therefore more capital repaid per installment). There is no need to "capitalise" it (which will usually reduce you installment and make it unavailable for withdrawal). Once you withdraw it, your capital balance will increase again with a commensurate increase in the amount of interest charged. That said, because of the increased capital proportion of the payments while the balance was lower, you will still have reduced the term of the loan. But obviously this impact is bigger the longer you leave the cash in the bond.

 

[Mike Hoxbig]

Once you withdraw it, your capital balance will increase again with a commensurate increase in the amount of interest charged. That said, because of the increased capital proportion of the payments while the balance was lower, you will still have reduced the term of the loan. But obviously this impact is bigger the longer you leave the cash in the bond.

This is the part that doesn't seem to be happening, because this is also my understanding of what was supposed to happen.

What's actually happening is when you withdraw, the capital balance goes up by the amount you withdrew.

As an example of what seems to be happening:
Capital balance - R2,000,000
Extra Payment (reserve amount) - R1,000,000
Installment - R20,000

Once the debit order goes off:
Capital balance - R1,985,000
Capital portion of installment - R15,000
Interest portion of installment - R5,000
Reserve balance - R1,000,000

Now you withdraw R10,000:
Capital balance - R1,995,000
Reserve balance - R990,000

So the nett effect is the capital balance is reduced by R5,000. This is probably the same, or even worse, than just letting the debit order run as normal, at the original term, with no additional funds.

Which means I don't seem to be getting any benefit. So I may as well just dump the money into an investment account and earn interest on it. Or capitalise it and reduce the installment.

The cashflow is more important to me, but I thought that doing it this way (withdrawing a small amount each month) would provide the best of both - reduce the term and provide cashflow...

 

[SinSeeker]

This is the part that doesn't seem to be happening, because this is also my understanding of what was supposed to happen.

What's actually happening is when you withdraw, the capital balance goes up by the amount you withdrew.

As an example of what seems to be happening:
Capital balance - R2,000,000
Extra Payment (reserve amount) - R1,000,000
Installment - R20,000

Once the debit order goes off:
Capital balance - R1,985,000
Capital portion of installment - R15,000
Interest portion of installment - R5,000
Reserve balance - R1,000,000

Now you withdraw R10,000:
Capital balance - R1,995,000
Reserve balance - R990,000

So the nett effect is the capital balance is reduced by R5,000. This is probably the same, or even worse, than just letting the debit order run as normal, at the original term, with no additional funds.

Which means I don't seem to be getting any benefit. So I may as well just dump the money into an investment account and earn interest on it. Or capitalise it and reduce the installment.

The cashflow is more important to me, but I thought that doing it this way (withdrawing a small amount each month) would provide the best of both - reduce the term and provide cashflow...

Keep it there for another month and then see what the difference in your interest amount paid is.

 

[Jehosefat]

This is the part that doesn't seem to be happening, because this is also my understanding of what was supposed to happen.

What's actually happening is when you withdraw, the capital balance goes up by the amount you withdrew.

As an example of what seems to be happening:
Capital balance - R2,000,000
Extra Payment (reserve amount) - R1,000,000
Installment - R20,000

Once the debit order goes off:
Capital balance - R1,985,000
Capital portion of installment - R15,000
Interest portion of installment - R5,000
Reserve balance - R1,000,000

Now you withdraw R10,000:
Capital balance - R1,995,000
Reserve balance - R990,000

So the nett effect is the capital balance is reduced by R5,000. This is probably the same, or even worse, than just letting the debit order run as normal, at the original term, with no additional funds.

Which means I don't seem to be getting any benefit. So I may as well just dump the money into an investment account and earn interest on it. Or capitalise it and reduce the installment.

The cashflow is more important to me, but I thought that doing it this way (withdrawing a small amount each month) would provide the best of both - reduce the term and provide cashflow...

It does happen (it legally has to) but because the difference is only R10k per month you are not noticing the difference in interest on a monthly basis. The R10k change in the balance will only make a difference in the interest of around R80 per month (@9.5% interest rate).

It is not the same or worse than just letting the debit run. It's better, just not very much better. In your example, had you not had the R10k in the bond, the capital balance would have been R1,995,080 at the end rather than the R1,995,000 that you show. Obviously the larger the amount you've paid in and the longer you leave it the bigger the impact.

For example, on a R2mn bond over 20 years at a 9.5% interest rate. If you pay in an additional R250k after 12 months and leave it in for the rest of the term, the bond will be paid off in 178 months rather than 240. If however you make the same payment but withdraw it in 10k increments over the following 25 months the bond will be paid off in 233 months rather than 240. So you do still get a benefit, it's just much smaller the sooner you withdraw the additional funds.

If the payment was R1m and you leave it in, the term is reduced to 79 months. If you withdraw it over 25 months (@40k per month) as above then the term is reduced to 213 months. If you withdraw it at at R10k a month over 100 months the term is reduced to 166 months.

So as you can see, the larger the amount and the longer it stays in the bond, the more the term is reduced (and the less interest you pay).