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Become your own bank by using your home loan and access bond

July 17, 2023
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Finsesh
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Finsesh

Become your own bank by using your home loan and access bond

Most people with a home loan don't know how it works. If you don't understand how your bond repayments work, then you won't know how to take advantage of your bond. Better yet, you can even become your own bank by using your home loan. 

This article aims to simplify and explain the details of a home loan and effectively use your access bond. Ensure you take advantage of your home loan and access bond to fast-track your time to financial independence. 

 

How amortisation on your home loan works 

Amortisation is a scary word at best with no meaning for many. Let's simplify amortisation. Amortisation simply means reducing debt with regular repayments. Because we borrow from a bank, they charge interest on your home loan, and we aim to reduce this debt with regular payments by reducing capital (principal).

We end up with two parts of bond repayment, firstly, interest to the bank and secondly, capital (principal) to reduce the bond. An amortisation schedule shows how these repayments work over time. We all have a love-hate relationship with banks, and they always get their pound of meat. For this reason, the bigger portion of your bond repayment goes to interest repayment first. Let's see the details. 

Looking at the amortisation schedule below, you'll notice the interest is much bigger than the capital (principal) repayments initially then it breaks even at month 154 (12.8 years) meaning that your interest repayments are similar to your capital repayments and finally you will start paying less interest and more toward capital outstanding. The link above leads to a tool that can help you with your assumptions.

Below are a few snapshots of an R1m bond being repaid over 20 years at an interest rate of 9.5%

Notice the interest is, initially, much higher than the capital repayments in relation to the monthly payment 

 

Notice how your principal (capital) repayments become more than the interest repayments at month 154. 

Finally, notice the interest becomes very small toward the end(month 236) as most of your repayment goes toward capital (principal) repayments.

 

How does my access bond work? 

Now that we understand amortisation and the fact that there are two parts to your monthly bond repayments. We will understand how your access bond works.

The interest on your bond is calculated on the outstanding balance of the bond. When you make extra payments to your access bond, the outstanding balance of the bond is reduced, which reduces the amount of interest you are charged. So, by making extra payments, you can effectively pay off your bond faster and save on interest charges. The extra payments you make are available for you to withdraw.

The learning focus is to understand that you only pay interest on the outstanding balance. Once you grasp this, then the rest will be easy to understand. 

Not all banks treat access bonds the same, some automatically reduce your bond while others don't. Let's have a look at the two scenarios. 

If the monthly amount remains the same after extra repayment: If your monthly repayment stays the same after making extra contributions, it means that your interest portion of your repayment will reduce(saving you interest) and a bigger portion will repay the capital. Your extra repayments will be available for you to withdraw in the access bond facility.

If the monthly amount reduces after extra repayment: If your monthly repayment reduces, you will create cash flow by paying less per month on your bond, but your extra repayments in your access facility will reduce over time as the bank will use this as capital repayments to reduce the bond to zero as per the example above.

You need to phone your lender and find out how they manage your extra repayments. It's important to note that some access bond providers allow you to adjust your monthly repayment amount, but this is not typically automatic and would need to be arranged with the lender. Phoning the bank and asking to reduce your bond and monthly amount is called capitalisation of your extra repayments. 

There is no financial advantage to having your extra repayments capitalised. The only scenario would be if you need income (cash flow from rentals) from your property. By reducing your monthly bond repayments you create positive cash flow from your rental property. You can phone your bank and ask them to capitalise your extra repayments, your bond will then reduce, but you will lose access to your extra repaid funds. 

 

Home loan interest rate vs bank savings rate

As I'm writing this, a savings account returns 6.55% where the prime interest rate is 10.75%. I bring to your attention that if you want to save or keep money aside, using your access bond at these rates is not a bad idea. You might not make money via interest, but you make money by saving on the interest you repay on your bond. The money saved in the access bond is tax-free, which makes for a great after-tax savings rate. It's been a while since by repaying debt, you are getting double digit returns. 

 

Using your property as a bank

Finding funding for businesses or loans can be a cumbersome experience, with piles of

documents to be completed leading to a disheartening end where they tell you that they can

only fund a portion of your request. Using your property as a bank is one of the best ways to

secure these additional funding requirements.

Let's first define property equity before we delve into this section. Property equity is the

difference between the property's fair market value and the outstanding loan amount. As the

value of the property increases over time due to renovations, or you repay the loan sooner,

will increase the equity in the property. Property equity can be used as funding for

any other business venture that needs financing. How to access this property equity?

Second loan:

To access the equity portion of your property, give the bank, which granted the loan, a call and ask them for an increase on the initial bond. They will send out a valuator to confirm the

property equity increases and will pay the money in your account within days. This loan can be utilised in your businesses at an interest rate to yourself, effectively becoming your own banking institution.

Access bond:

If you have an access bond account, your extra monthly repayments for the property will be

accumulated in this fund. You can withdraw it at any time, preferably for investment purposes

only.

 

Summary: 

Quite an insightful session, we understand that a bond repayment is made up of two parts, and by making extra repayments we save on interest paid to the bank. In the future, we can use these access bond amounts to fund or expand business ventures or even access the equity in the property as it grows over time. Give your bank a call and find out how your access bond works. Use this knowledge to finance your future empire. 

 

If you want to find out more about becoming financially independent, please see our free course. If you want a blueprint toward financial independence, you can enrol in our Stages to financial independence course.

Onward to Financial Independence 

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