Have you ever considered using your home loan account as a savings account for short-term savings or perhaps an Emergency Fund? You’ll get a great interest rate with no risk.
There are a few conditions that would need to be met in order for you to do this;
- you have a home loan (mortgage bond),
- you can deposit money and withdraw money from your bond at any time (sometimes called an Access Bond), and
- the annual interest rate you pay on your home loan is higher than what you earn in your savings account (you may earn 4% in your savings account whereas your home loan may have a rate of 9% or more)
If you meet the above criteria then read on!
Why save money in your Home Loan?
The logic is very simple… When investing money, the higher the interest rate the better! If your home loan interest rate is 11% and you save additional money in that account, you’ll be earning a guaranteed 11% growth each month! That is really great as it is a very low-risk and stable investment. The money is also immediately accessible which means it’s perfect for short-term cash savings. Using your home loan as a savings account is completely dependent on the prevailing interest rates, so sometimes it is a great option while at other times it may not be.
Also note that the growth on your money is essentially tax free as you’re reducing your debt as opposed to earning money.
Let’s look at the numbers
Let’s say you have R10,000 and you save it in a Capitec bank account at 5% interest for 6 months. After 6 months you will have earned R252.62 in interest. You can decide what to do with this extra money that you earned; either keep it in the account or use it!
The same R10,000 saved in your Home Loan for 6 months will earn R562.76 interest (using an interest rate of 11%). Unlike the first example, this interest is not added to your account but the outstanding balance of your loan is reduced. It’s essentially the same thing but instead of seeing extra money in your account, your loan balance is simply reduced. You can however still decide what to do with the interest you earned. You can leave it in the account (probably the best option) or you can withdraw it (and increase your loan to what it would have been). Either way, you earned more interest and it paid to save the money in your home loan account.
It’s really just as simple as that. You’re potentially earning a much higher interest rate which instead of paying cash, reduces your home loan balance. It’s easy to calculate this interest; a simple calculation can be done as follows:
R10,000 * 0.11 = R1,100 – this is the annual interest (but it is not compounded)
Thus, R1,000 / 2 = R550 – the interest earned over a 6 month period.
The more accurate calculation showing the compounded growth will require the Future Value (FV) formula in Microsoft Excel. You’ll need the interest rate per period (11% / 12 months), the number of periods (6 months) and the starting value (R10,000). This formula gives the amount of interest as R562.76.
You can of course do the calculation with a daily compounded growth but that is perhaps over-complicating things a bit.
Reducing your home loan
A little trick that is worth considering is to transfer your entire salary into your home loan account as soon as it’s paid and to leave it there for a few days or as long as possible. You can then transfer it back to your usual account when needed but the interest earned for those few days will reduce the bond and ultimately help you pay it off sooner without actually costing you a cent.
Before you go ahead and transfer money into your bond account first verify whether your bank has any rules regarding deposits and withdrawals. Some banks may limit the transactions per month or may require transactions in increments of thousands. Once you know the specifics of your account you can decide what will work best for you and start earning the best interest rate possible on a short-term savings.