There are many saving and investment options available to consumers. What you decide to use is dependent on your circumstances. But should you make your home loan your choice of a savings vehicle and how exactly does that work?
JustMoney found out from industry experts how home loans can work as savings tools.
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How can you use your home loan as a savings tool?
“Using your home loan as a savings tool is as simple as depositing any amount in excess of your monthly repayment,” says Hayden Giger, growth head of FNB Private Bank Lending.
Giger says the excess amount will reduce the outstanding balance which in turn will reduce the number of years that you pay your home loan over. This in turn can result in a significant interest saving over the period of the loan.
According to Geoff Lee, managing executive of home loans at Absa, this is also known as an “Access bond” facility by the market.
“This money is deemed to be a pre-payment for the home loan and the customer is able to withdraw amounts permissible by the bank on these pre-payments.
Lee says you don’t earn interest on the pre-paid funds, as they are applied to reduce the principal debt. However, the interest charged on the outstanding capital will be reduced.
Should you use your home loan to save?
According to Lee, the access bond facility offers the following primary benefits:
- The ability to pay less interest on the home loan account due to a reduced outstanding balance.
- It allows you to pay off a home loan earlier.
- You can access funds from the pre-paid (extra) funds, via a transfer from the home loan account into the transactional account.
“Rates on lending products such as home loans are typically higher than the rates earned on savings accounts. This means that you can expect to save more interest if you prepay your home loan compared to saving the same amount in a savings account,” says Lee.
Lee says returns on savings and investments can often carry some level of risk (depending on the product chosen), and may also be taxed if they reach a certain threshold. However, saving interest on your home loan is more certain and does not attract tax in the same way as if you had earned interest.
Giger agrees that making prepayments on your account is a good idea.
“The interest that you are charged on your home loan is usually greater than the interest rate you will receive on cash investments. The excess funds that you deposit into your home loan are readily available to you if you have an access bond,” says Giger.
READ MORE: Why a deposit on your home loan is best
Carl Coetzee, CEO of BetterBond also agrees that your bond is an effective platform for investing your savings, as the interest on most bonds is higher than the returns you’re likely to make on even the best-yielding investment.
“The question around whether it is 'better" to use your bond as your only form of savings is one we are often asked, and also one where a simple yes or no answer does not quite suffice,” says Coetzee.
He says as property is likely to be your biggest investment, and therefore your biggest asset, it’s better to pay it off sooner, so that you’ll be able to leverage it as collateral for further investments.
“The reality for the majority of people with a bond is that in the first years the monthly payments go towards paying the interest on the loan. It may take years before those payments start making a dent in the principal debt,” says Coetzee.
He says the more you pay into your bond every month, the less interest you will be charged and the faster you’ll be able to pay off the bond.
To illustrate this, Coetzee made this example:
R1 million bond at 7% interest, payable over 20 years
Minimum monthly repayment = R7 753
New monthly repayment (R1000 extra) =
Total loan amount = R1 652 262.00
Total interest = R 652 262.00
New loan duration = 189 months (15 years, 7 months)
Total savings on interest = R208 456
“Paying extra into your bond, be it R500 or R1 000, is not a case of taking all your savings and putting it in your bond, but rather about being disciplined to put something extra - whatever you can afford - into your bond. This can have a significant impact on your interest and will allow you to pay off your bond far sooner,” says Coetzee.
However, Lee does caution that it’s always important to speak to your bank or authorised financial adviser when it comes to planning your financial future.
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