Depending on how your access bond is structured, you might not be able to withdraw all of your prepaid funds.
Many people believe that putting all of their “spare cash” into their access bond is a smart thing to do. It can serve as your emergency fund because those extra payments are immediately available. Or are they?
In reality, the amount of your prepaid funds that you can withdraw depends on how your specific home loan facility works. If the bank uses the prepaid funds to reduce the outstanding balance, it may reduce your monthly instalments, with the result that your available funds will decrease each month.
If you maintain your original instalments as per the loan agreement, then the prepaid funds do remain available. This is usually the case with FNB Flexi Option, Standard Bank Access Bond Option 1, and Absa FlexiReserve.
However, the prepaid funds may not be fully available if there is a change in interest rates. The construct of Standard Bank’s home loan facility, as well as Absa’s, is such that when interest rates change, there is effectively a reset in terms of the outstanding balance and therefore the instalment.
For example, if you had a mortgage facility of R1 million and deposited a prepaid amount of R100 000, the outstanding balance would be R900 000.
If nothing changed in terms of interest rates, the instalment would be around R9 980 based on the initial mortgage (amortisation balance) of R1 million paid off over 20 years. The full R100 000 prepaid would be available to withdraw. The client’s interest calculation takes into account the benefit of the prepaid funds which would result in the loan being paid off earlier.
However, when interest rates increase (as has been the case over the last 18 months) the loan is “reset” according to the outstanding balance of R900 000. This means the instalment would now be calculated on the R900 000 balance paid off over the remaining period.
In this example, if interest rates increased by 100 basis points, on the original loan agreement of R1 million the instalment would normally increase from R9 980 to R10 664. But due to the prepaid funds of R100 000, the loan is now reset, and the instalment is now calculated on the balance of R900 000. This means the instalment would be lower.
This means the prepaid funds would reduce each month by the difference between what the instalment would have been on R1 million vs R900 000. It also means that if you wished to withdraw any prepaid funds, your instalment would increase as your outstanding balance would increase from R900 000.
Additional reading: How does my access bond work?
Absa applies a similar principle. According to Nondumiso Ncapai, Managing Executive: Absa Home Loans, in the case of an interest rate increase, the bank will recalculate the customer’s instalment based on the reduced outstanding balance and increased rate.
According to Steven Barker, head of lending at Standard Bank, customers do have 30 days to amend their debit order to ensure their prepaid funds remain fully accessible.
“When interest rates increase, the new interest rate and repayment amount is applicable immediately. The bank does however give a client 30 days’ notice before the debit order is updated to the new repayment amount.”
Standard Bank provides the 30-days’ notice before debit order amounts are changed in order to ensure that clients can make sufficient provision for their next repayment, and so that clients are able to contact the bank to apply the higher debit order amount following an interest rate increase, before the next repayment is due.
Barker does warn however, that due to the mismatch between when the the repayment amount and debit order amount is updated, in some cases the prepaid funds may decrease despite the client being on Option 1.
According to FNB, their Flexi Option does not change when interest rates increase. Angela Glover from FNB Home and Structured Lending Solutions says that in the case of an interest rate increase, “your repayment increases by the full amount as you still have access to those prepaid funds and could withdraw them at any time.
“Should you prefer to reduce your repayment, you can do so on the FNB App or contact the bank to assist you to structure your loan in the way that works best for you. Keep in mind that reducing your repayment will mean you no longer have access to the extra funds you paid in advance.”
Another point of confusion for customers of most banks is the availability of the prepaid funds at month end. Customers have complained that for up to ten days before month end their full prepaid funds are not available.
Glover explains that if payment is made via debit order, there is a period of time required for funds to be cleared. “For this period whilst awaiting the clearance, your available amount for withdrawal is reduced by the repayment amount, until such time as the debit order is cleared. Once cleared, the payment is considered as honoured, and your prepaid amount is adjusted.
“This is to ensure that your account does not fall into arrears and in the event that your debit order or payment is dishonoured for that specific month, then it will dip into the prepaid amount (the funds which have been held) to keep your account up to date.”
If you are unsure about how your access bond works and why your prepaid funds are not fully available, speak to your bank and get clarity on how your account works and what the various options are.
How the banks treat prepaid funds
Absa: maintains instalment amount
FlexiReserve allows you to access any additional funds that you have already paid over and above the minimum monthly payment on your 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: maintains instalment amount
FNB’s Flexi Option provides the ability to deposit surplus funds and further allows electronic access to these funds 24 hours a day. Monthly instalments remain the same throughout the term of the loan, so surplus deposits remain available.
Nedbank: lowers monthly instalment
The NedRevolve facility on the Nedbank home loan enables you to access any surplus funds accumulated over time when you pay more than the minimum instalment or a lump sum into your 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: you can choose whether to include prepaid funds in your monthly instalment
The Standard Bank AccessBond allows you to choose whether you want additional payments to reduce your monthly repayment or to pay off your loan sooner. The AccessBond Link Option 1 is designed for clients who make additional payments in order to pay their loan off sooner and the AccessBond Link Option 2 is designed for clients who make additional payments in order to lower their monthly repayments (ideal for clients looking to increase their monthly cash flow).
AccessBond Link option 1: The instalment will not decrease when funds are prepaid into the account; these funds will result in the loan being paid off quicker if those additional funds are not accessed, saving you interest. You are able to access all your prepaid funds unless there is a change in interest rates.
AccessBond Link option 2: The instalment will decrease 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 the amount will be reduced over time as you are taking this benefit in a lower monthly instalment.
This article first appeared in City Press.