This is an awesome trick that many people miss. Before I go into details though there are a few conditions that need to be met in order for it to be applicable to you. Perhaps it’s not a viable option for you right now but remember to look into it again every so often.
Qualifying Check-list (can you answer YES to each of these):
- 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)
- The annual interest rate you pay on your home loan is higher that the interest you earn on a standard bank account. (Eg you earn 5% interest on a normal transactional bank account and yet your home loan interest rate is 11%)
If you meet the above criteria then read on!
NOTE: The interest rate examples are applicable to South Africa. Use the interest rates applicable to you to test whether this trick will work for you.
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 then you will 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.
Let’s look at a practical example (relevant to South Africa):
You have R10,000 and you save it in your 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% for the example). Unlike the first example, this interest is not added to your account but the outstanding balance of your loan is reduced. So it’s the same thing really, 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. Either way, you earned more interest and it paid off to save the money in your home loan account.
It’s really just that simple. You can calculate the interest you will earn by using Microsoft Excel and something interesting to think about is to lump all your savings together and to simply keep track of them in Excel by creating Savings Pockets.
You can also take my Home Loan Calculations course with over 40 minutes of instructional video explaining all the Excel formulas you need. You’ll get to learn all you need to about what effect your savings in your bond will have, even if you draw it out at a later stage.
If this trick can earn you extra interest you can even consider transferring your entire savings into your bond and only withdrawing money as you need it. This involves slightly more admin but could be earning you a few hundred extra rand each month!
Before you go ahead and do this, just verify if your bank has any rules regarding deposits and withdrawals. Some banks may limit the transactions per month, or require you to only transaction in increments of thousands. Do you homework and then work the system…
Let me know your thoughts.