Homeloan access bond

[D3x!]

Hi,

quick one, we are trying to understand something here regarding a debate.

if you have a home loan, and you have some cash, (i will setup a hypothetical below) does parking the money there (and not generating interest benefit you in the longer run) - please dont compare if you were earning a higher interest rate in income, that isnt the argument.

will keep number simple, lets say you have a R500k bond. and you have R100k cash.

would it be worthwhile to put the R100k into the bond, pay off the bond quicker as I assume you will be paying less interest monthly, and then pull out the R100k when it is paid off and pay off the remaining R100k normally?

and would this work at any ratio?

if you have a 500k bond and 200k, 300k etc?

also would it work if you dont even wait until it is paid off, so say you park your 100k and take it out after a year or 2, would you still be benefiting from the lower interest in the interim?

thanks
D3x!

/ps if you are interested my side of the debate is that you would benefit, and again we are comparing parking the money there to general savings type accounts like money markets etc. i.e your interest earnings will always be below your interest on homeloan, and your home loan interest value is much higher.

 

[KingRat1]

If you parked the 100K in the bond for any amount of time you would benefit by the interest not payed by the 100 k. In your example interest will only be for the 400 k thus saving the interest on the 100 K

 

[Rkootknir]

Hi,

quick one, we are trying to understand something here regarding a debate.

if you have a home loan, and you have some cash, (i will setup a hypothetical below) does parking the money there (and not generating interest benefit you in the longer run) - please dont compare if you were earning a higher interest rate in income, that isnt the argument.

will keep number simple, lets say you have a R500k bond. and you have R100k cash.

would it be worthwhile to put the R100k into the bond, pay off the bond quicker as I assume you will be paying less interest monthly, and then pull out the R100k when it is paid off and pay off the remaining R100k normally?

and would this work at any ratio?

if you have a 500k bond and 200k, 300k etc?

also would it work if you dont even wait until it is paid off, so say you park your 100k and take it out after a year or 2, would you still be benefiting from the lower interest in the interim?

thanks
D3x!

/ps if you are interested my side of the debate is that you would benefit, and again we are comparing parking the money there to general savings type accounts like money markets etc. i.e your interest earnings will always be below your interest on homeloan, and your home loan interest value is much higher.

Most bonds are installment loans with fixed terms where you pay off interest and some of the principal of the loan with each payment.

The way that interest is calculated means you pay far more interest with each of your payments at the start of the term compared to the end of the term. e.g. take a R500 000 bond at 10% nacm over a term of 20 years. Your monthly payment will be around R4 800. Your first monthly payment will be split something like this (not precise as banks use actual day count and not average month lengths):

To interest: 500000 x 10% / 12 = R4 166.67
To principal: 4800 - 4166.67 = R6 33.33

So, at the end of the first month your balance will be 500000 - 633.33 = R499 366.67

In general this means that any additional capital you put in would be better at the start of the period than at the end. e.g. using the example above and paying in R100 000 immediately - In the first month your payment is now split as follows:

To interest: (500000 - 100000) x 10% / 12 = R3 333.33
To principal: 4800 - 3333.33 = R1 466.67
Balance at end of first month: (500000-100000) - 1466.67 = R398 533.33

You can construct an amortisation table on this to get the full effect over the entire period. Quick calc on my side using the example above:

R500 000 original loan:
Total payments of R1 158 000 (i.e. interest of R658 000) and term of 20 years

Paying R100 000 up front:
Total payments of R685 000 (interest of R285 000) and zero outstanding after about 12 years.
Let's say you take out R100 000 at this point and leave the payments at R4 800 p.m. That gives total payments of around R110 000 (i.e. R10 000 interest) and zero outstanding after 2 years. In other words you have saved around 658000-(285000+10000) = R363 000 interest and paid the loan off in 14 years instead of 20.

PS: Anybody willing to check the math? I did this quite quickly...

 

[St3lth]

Additionally assuming a loan repayment term of 20 years for the 500k will reduce to 16 years of payments proportinately.

 

[D3x!]

Most bonds are installment loans with fixed terms where you pay off interest and some of the principal of the loan with each payment.

The way that interest is calculated means you pay far more interest with each of your payments at the start of the term compared to the end of the term. e.g. take a R500 000 bond at 10% nacm over a term of 20 years. Your monthly payment will be around R4 800. Your first monthly payment will be split something like this (not precise as banks use actual day count and not average month lengths):

To interest: 500000 x 10% / 12 = R4 166.67
To principal: 4800 - 4166.67 = R6 33.33

So, at the end of the first month your balance will be 500000 - 633.33 = R499 366.67

In general this means that any additional capital you put in would be better at the start of the period than at the end. e.g. using the example above and paying in R100 000 immediately - In the first month your payment is now split as follows:

To interest: (500000 - 100000) x 10% / 12 = R3 333.33
To principal: 4800 - 3333.33 = R1 466.67
Balance at end of first month: (500000-100000) - 1466.67 = R398 533.33

You can construct an amortisation table on this to get the full effect over the entire period. Quick calc on my side using the example above:

R500 000 original loan:
Total payments of R1 158 000 (i.e. interest of R658 000) and term of 20 years

Paying R100 000 up front:
Total payments of R685 000 (interest of R285 000) and zero outstanding after about 12 years.
Let's say you take out R100 000 at this point and leave the payments at R4 800 p.m. That gives total payments of around R110 000 (i.e. R10 000 interest) and zero outstanding after 2 years. In other words you have saved around 658000-(285000+10000) = R363 000 interest and paid the loan off in 14 years instead of 20.

PS: Anybody willing to check the math? I did this quite quickly...

that math

but i get what you mean, and this is my stance, some of the others disagree.

i have also seen a video where they calculate that even paying 10% more per month reduces your term to something like 10 years.

 

[zerocool2009]

If you pay that into your bond, it is a guaranteed saving with no monthly fees going off as an extra expense

I saw an article a few weeks back, comparing money markets, unit trusts savings accounts, TFSA (tax free savings account), RSA retail bonds vs pre paying your bond.

Prepaying your bond won by far.