There is one thing that all bank loans have in common – whether it’s a home loan or a personal loan, any additional money you pay above the minimum requirement will save you interest. So, if you can afford to, always pay extra into any debt you have.
When it comes to asset finance, such as for a car and home, how that saving works in practice all depends on the structure of the loan agreement.
This is where the confusion comes in.
For example, when it comes to vehicle finance, any additional payments (prepayments) are usually kept in a separate facility and the interest benefit is a “set-off”.
When it comes to home loans, any prepayment reduces the outstanding balance, and this has various implications.
Depending on the home loan facility, a lower outstanding balance could reduce your monthly instalments, or it could reduce the term of your loan.
This depends on whether your monthly instalment is based on the amortisation or the outstanding balance.
If it is based on the amortisation balance, then the instalment remains the same as on the original loan agreement and the net effect is that you pay off the mortgage sooner.
If the instalment is based on your outstanding balance, then the amount you pay each month is reduced but the term (length) of the loan remains the same.
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Another important point is that banks calculate interest on your outstanding balance on a daily basis, but interest is only paid by the customer at the end of the month. Therefore, the outstanding balance increases by the daily interest charge during the month.
It is also why paying your mortgage even a few days earlier than it is due saves you interest.
It becomes more complex if you opt for an “access bond” from which any additional payments can be withdrawn. The banks all have different access bond options and how these work can be confusing to customers, especially when interest rates change.
It is important to understand how your mortgage provider treats additional payments.
LOWER MONTHLY INSTALMENT: CALCULATED ON THE OUTSTANDING BALANCE
In the case where your additional contributions, or prepaid funds, result in a reduction of your monthly bond instalment, the period of the loan remains the same.
To ensure that the outstanding balance as well as the funds available for withdrawal are both zero at the end of the term, the prepaid funds will reduce the capital portion not covered by the lower instalment that is being paid.
You will still be able to withdraw the available funds, but this will reduce over time, as you are taking this benefit in a lower monthly instalment.
monthly instalment remains the same: calculated on amortisation balance
In the case where your additional contributions or prepaid funds do not reduce the monthly bond instalment, which remains the same as the initial agreement, you will pay off the loan sooner if you do not access those additional funds.
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Absa: amortisation balance
FlexiReserve allows customers to access the additional funds they have already paid over and above the minimum required monthly payment on their home loan.
Additional funds paid in will not automatically lower your monthly repayment, unless you capitalise the extra amount paid in advance and instruct the bank to recalculate your repayment.
FNB: Amortisation balance
FNB’s Flexi option provides the option to deposit surplus funds and further allows electronic access to the funds 24 hours a day. Monthly instalments remain the same throughout the term of the loan, so surplus deposits remain available.
Nedbank: outstanding balance
The NedRevolve facility with the Nedbank home loan enables clients to access any surplus funds accumulated when they pay more than the minimum instalment or a lump sum into their home loan account.
The monthly instalment does adjust and is recalculated monthly when additional funds have been paid in. The availability of prepaid funds may be reduced by the capital portion not covered by the recalculated lower monthly instalments.
Standard Bank: amortisation balance or outstanding balance
Access bond link option 1: The instalment will not reduce when funds are prepaid into the account, but will result in the faster payment of the loan if additional funds are not accessed, saving the customer interest. You are able to access all your prepaid funds unless there is a change in interest rates.
Access bond link option 2: The instalment will reduce when funds are prepaid into the account, resulting in the term of the loan remaining the same. You will still be able to withdraw available funds, but this will reduce over time as you are taking this benefit in a lower monthly instalment.