Is your homeloan the best place to store your savings?

[Nerfherder]

Putting spare money on your bond is still the best thing to do (after clearing your credit card), I did some calculations and there are diminishing returns on dumping on your bond.

ie : Put extra 1k on your bond a month and you might save 5 years of payments, if you put 2k extra you might save 7 years of payments, 3k might save you 8 years of payments... etc.

So its a very good investment up to a point, then beyond that its still a good investment assuming you are able to sell your house for more money then you purchased it for.... also that you go the full 20 years and don't just sell it in 3.
I found the drop off point is somewhere where you are covering the interest every month. So if you are paying 10k a month on your bond and the interest is 9k and 1k is repayemnt then paying 9k extra is effective. Beyond 9k is not as effective.

Probably the better thing to do at that point is create an additional investment that is more accessible and different risk... to create diversity.

 

[Nerfherder]

Nope, it wasn't during the interest rate hike period.
Was some time last year. I withdrew the cash and they informed me at the branch that my new monthly instalment has gone up by ~R300 because of the withdrawal. I informed them that I am withdrawing from the surplus funds/deposits I had in my home loan and they said it doesn't make a difference.
I had no time to argue with them and I just needed the cash, so I just agreed and took the cash.

I know it sucks but long term its better if they do that.

You don't want to take a 10k personal loan over 20 years

 

[Cius]

Nope, it wasn't during the interest rate hike period.
Was some time last year. I withdrew the cash and they informed me at the branch that my new monthly instalment has gone up by ~R300 because of the withdrawal. I informed them that I am withdrawing from the surplus funds/deposits I had in my home loan and they said it doesn't make a difference.
I had no time to argue with them and I just needed the cash, so I just agreed and took the cash.

Sounds like what happened to me. You probably had your monthly premium dropping by a few rands each month but perhaps you did not notice it due to how gradually it built up. Only when you took a big chunk out did the premium go back to what it should have been all along. The banks are seriously dishonest in how they try force you to still pay off the bond in 20 years. Most people paying in extra want the term to shorten, not he monthly amount to decrease. The banks instead take it as default that you would prefer to have extra payments save you on your monthly premiums as that will earn them more money. They really don't have your best interests at heart. I had to force them to fix my debit order at a higher amount.

 

[SoulTax]

Parking your money in the bond is the best place if you intend to use it in the near future.

If you however just want to plonk it down somewhere to the get best return, then I would rather throw it into any other existing debt you might have as the bond is the one with the lowest interest.

This thinking is only half right.
If you have clothing debt, or credit card debt, then sure knock those off asap. That is because they should be small amounts that you can clear in a matter of months.
If you have a car though, even though it is a higher interest rate, it is not worth it to dump money into a depreciating asset that only has a few more years left on the payments. The interest rate might seem bigger, but the actual value of interest saved, if that money is put into a house instead, is far more beneficial.

 

[SoulTax]

I know it sucks but long term its better if they do that.

You don't want to take a 10k personal loan over 20 years

You should also make sure that you inform the bank that your extra payments are to go to paying off the capital. As banks will almost always take that extra money as "Payments in advance". So if you pay 10 grand per month normally and you are have paid an extra 100 grand in, they see that as you are 10 months in credit. Then if you withdraw money, you are not withdrawing from the advanced funds, but from the capital.

Make sure your bank knows that the extra money must go towards paying off the capital of the loan.

 

[Jehosefat]

You should also make sure that you inform the bank that your extra payments are to go to paying off the capital. As banks will almost always take that extra money as "Payments in advance". So if you pay 10 grand per month normally and you are have paid an extra 100 grand in, they see that as you are 10 months in credit. Then if you withdraw money, you are not withdrawing from the advanced funds, but from the capital.

Make sure your bank knows that the extra money must go towards paying off the capital of the loan.

Doesn't make a difference, interest is always calculated on outstanding balance. They often just show it to you as a separate line of "Funds in advance" so you know how much you can access.

 

[SauRoNZA]

Interesting, on my FNB home loan, they don't reduce the monthly payment when I pay in extra, but I didn't ask them to not reduce it. It is fine either way, I am planning to pay this of within 10 years vs 20 years. In the one event I did need the extra cash, they also didn't increase my monthly payments, however I am far ahead of where I should be, so I doubt they will just increase it.

Did you maybe statically set your debit order slightly higher than what you need to pay in? Or do you mean to say the amount on your statement of what you should be paying stays constant?

I would double check that my interest is dropping as time goes by if that is the case.

 

[SauRoNZA]

Nope, it wasn't during the interest rate hike period.
Was some time last year. I withdrew the cash and they informed me at the branch that my new monthly instalment has gone up by ~R300 because of the withdrawal. I informed them that I am withdrawing from the surplus funds/deposits I had in my home loan and they said it doesn't make a difference.
I had no time to argue with them and I just needed the cash, so I just agreed and took the cash.

Sounds perfectly normal to me.

Normally the surplus amount is virtually subtracted from the outstanding capital balance and then interest is calculated on that amount and added to your money instalments.

So if the surplus drops significantly the capital balance increases and therefore interest calculated on the capital balances increases accordingly.

That's how my Nedbank home loan works anyway.

My interest comes down every month as my surplus rises with additional payments.

 

[SoulTax]

Doesn't make a difference, interest is always calculated on outstanding balance. They often just show it to you as a separate line of "Funds in advance" so you know how much you can access.

Makes a huge difference. Because the interest is calculated on the Capital, not the outstanding balance. Without going into the nitty gritty of real numbers I will show an estimate here quickly:

Bond of 1 000 000 at roughly 10% interest over 20 years. You pay back around 2 400 000 or so in that time. With installments of 10 000 or so.

Case 1:
You pay 20 000 per month. The bank sees these as EARLY payments, they do not lower your base capital by the extra 10 grand per month, instead they note your account as "in credit", but calculate your interest off the capital as it would have been if you only paid 10 grand. You pay back your loan in 10 years, but you still paid 2 400 000 in total.
Case 2:
You pay 20 000 per month. You tell the bank that the extra amount goes to paying off the capital in advance, this decreases the capital on which your payments are calculated. You should receive communication that your payments are going down, as the bank is still calculating it over 20 years, you continue to pay 20 grand, eating into that capital. The exponential returns mean you pay the house off in around 5 years and 10 months. You only pay about 1 500 000 or something like that. Because each payment was reducing your capital.

Case 1 should not be how it works by default, but banks get more money out of you by pretending to be stupid and not knowing what you are trying to do. If you are not explicit with them, they will try to structure it into the deal that works the best for them.

Granted, I don't know how this works with an access bond specifically. But in general, if you are trying to pay your mortgage off early, to save yourself the most money possible, just make sure that you and your bank have an understanding of what the extra funds are for.

 

[Jehosefat]

Makes a huge difference. Because the interest is calculated on the Capital, not the outstanding balance. Without going into the nitty gritty of real numbers I will show an estimate here quickly:

Bond of 1 000 000 at roughly 10% interest over 20 years. You pay back around 2 400 000 or so in that time. With installments of 10 000 or so.

Case 1:
You pay 20 000 per month. The bank sees these as EARLY payments, they do not lower your base capital by the extra 10 grand per month, instead they note your account as "in credit", but calculate your interest off the capital as it would have been if you only paid 10 grand. You pay back your loan in 10 years, but you still paid 2 400 000 in total.
Case 2:
You pay 20 000 per month. You tell the bank that the extra amount goes to paying off the capital in advance, this decreases the capital on which your payments are calculated. You should receive communication that your payments are going down, as the bank is still calculating it over 20 years, you continue to pay 20 grand, eating into that capital. The exponential returns mean you pay the house off in around 5 years and 10 months. You only pay about 1 500 000 or something like that. Because each payment was reducing your capital.

Case 1 should not be how it works by default, but banks get more money out of you by pretending to be stupid and not knowing what you are trying to do. If you are not explicit with them, they will try to structure it into the deal that works the best for them.

Granted, I don't know how this works with an access bond specifically. But in general, if you are trying to pay your mortgage off early, to save yourself the most money possible, just make sure that you and your bank have an understanding of what the extra funds are for.

I've worked at 2 banks and I can say with certainty that it makes no difference. For home loans, interest is calculated daily on outstanding balance and is then capitalised monthly. Any payments that you make over and above the required minimum are taken off the outstanding balance. You can however ask them not to recalculate your payments so that what they take off on the debit order doesn't decrease as you pay off more of the bond. Although in my experience, this has been the standard approach.

 

[Other Pineapple Smurf]

This thinking is only half right.
If you have clothing debt, or credit card debt, then sure knock those off asap. That is because they should be small amounts that you can clear in a matter of months.
If you have a car though, even though it is a higher interest rate, it is not worth it to dump money into a depreciating asset that only has a few more years left on the payments. The interest rate might seem bigger, but the actual value of interest saved, if that money is put into a house instead, is far more beneficial.

Disagree.

You are better off paying off the car at the higher interest. When your car is paid off you take that payment and then pay it into your bond.

Too many people ignore the real cost of debt as they ignore the monthly admin fees and extra insurance.

I would gladly give you some examples but I need to study for my university accounting exam tonight.

 

[FlashSA]

I disagree. You can't get the extra money back out of the car when you need it. With an access bond you can.

 

[noxibox]

I disagree. You can't get the extra money back out of the car when you need it. With an access bond you can.

If the intent is to have access to the money, then mortgage is the best option. If it is just to save as much interest as possible, then it is whichever debt has the highest interest first.

 

[OCP]

If the intent is to have access to the money, then mortgage is the best option. If it is just to save as much interest as possible, then it is whichever debt has the highest interest first.

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