A home loan is more than just a simple facility to keep up with until your property is paid off. It can be a sophisticated money management tool, if managed correctly.
“A pre-paid home loan facility allows consumers to transfer excess funds into their Home Loan, effectively saving on interest while being able to use the funds at no additional cost,” says Tommy Nel, head of credit at FNB Home Loans.
Let’s look at different ways this can benefit you assuming you have a bond of R1 million which you have at prime (10.5%), your current repayments will be R9 984.
Daily capitalisation of interest
Interest is calculated daily and capitalised to your home loan monthly. This means that any additional funds that are put into your home loan, even if it is for a day, will reduce the interest that you will be charged for that month.
“Say for example, you are paid on the 25th of the month however your various debt orders amounting to R20 000, including your bond, go off on the 1st. By placing the entire R20 000 into your home loan for the five days this money will work for you by saving interest on this amount of about R29 at your Home Loan rate of interest for that month,” says Nel.
By aligning their debit order dates to fall on their salary date, consumers can also achieve this benefit and ensure what is probably their most important asset is paid first.
Many consumers are not aware that credits into an account are processed before debits, meaning that you don’t have to schedule your debit orders to only run on the following day.
Having your debit order run on the date of your salary saves you interest in the long run and helps you protect your credit record by ensuring your financial commitments are all settled.
Making full use of your pre-paid funds
“Prepaid funds allow you to access the power of compound interest by saving at your home loan rate of interest and the longer you leave the funds in your home loan, the more you will unleash its potential,” says Nel.
This can help improve your financial resilience by helping you eliminate the need to use expensive unsecured debt when you are faced with unexpected expenses like your car letting you down or any other little surprises.
“You can also save to build up enough prepaid funds to allow yourself a payment holiday over those difficult holiday months such as December, January and April where there tends to be more month than moola,” says Nel.
Pay upfront costs
“There are instances where paying certain costs in full, upfront for an entire year, such as in the case of insurance or school fees can help generate annualised return on such an ‘investment’ of in excess of 15%, depending on the exact terms of such offers,” says Nel.
Using the facility linked to your Home Loan and regularly paying excess funds into your Home Loan can make this possible, whereas funding annual expenses from one’s monthly salary, is something that is probably out of the reach of the majority of South Africans.
For example, let’s assume your annual school fees are R24 000, and you receive a 10% discount if you pay the entire amount before the end of January. You can either pay R2000 a month, or you can pay R21 600 on the 31st of January, using funds you have saved in your Home Loan. The effective return on this would be in excess of 20%.
“All new FNB Home Loan clients are automatically granted a Flexi Facility when they take up a loan with FNB which allows you customer’s additional funds into your home loan as well as access those pre-paid funds”.
“There are no additional costs involved with using you pre-paid facility making it a cost effective way to utilize your money,” concludes Nel.