An awesome trick that many people miss is to use your home loan as a savings account. Potentially great interest and easy access to your money. This is not recommended for large amounts of cash, and also not for your Emergency Fund. For more on that have a look at where to save your Emergency Fund.
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%)
- You don’t intend to save large amounts of cash. Take a look at this post on emergency funds for more details. But basically, the bank does not necessarily need to give you access to the extra funds in your home loan account. They could ask you to complete a credit worthy application.
If you meet the above criteria then read on!
Using home loan as a savings account
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
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.
How does access bond work
In general, an access bond allows you to deposit extra money into your account, thereby reaching your outstanding loan. You can then also withdraw that money again (or access it). Most banks allow you to simply use internet banking for this and you are often limited to withdraw in denominations of R1,000 only.
This may work for small amounts, but the complication is for larger sums. For a bank to advance you additional money, they need to satisfy themselves that you can in fact service the larger monthly bond payment. If you suddenly want to draw R100,000 from your bond, your bank may require you to repeat an affordability exercise. If you have just lost your job, how will you show the bank that you can still service the loan?
Thus, the large amounts of extra money saved in your bond are not always accessible to withdraw. Hence, don’t save your entire emergency fund or holiday trip money here without first consulting with your bank to find out any T’s & C’s.
How much interest are you paying on your home loan?
Use the Home Loan Calculator to see the exact monthly instalments broken down to the principle and interest payments. This will show you how home loan interest works as the first few years you’re mainly paying interest and hardly any actual debt.
To close
This is a great trick for smaller amounts of cash over the short-term. But, do your homework and make sure that you understand your banks specific rules surrounding this.
Thanks and what if your bond is paid up? will it still earn interest on the positive balance?
No, you cannot have a positive balance in your bond.