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.
An example
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.
Thank you for all the amazing content.
As per the Standard bank example of 1 mil and the 100K prepaid amount.
If the interest rate goes up and your monthly repayment is recalculated on 900k, should you contact the bank and adjust the debit order to a higher value, to ensure your available prepaid funds are available in full.
Would the same apply if the interest rate decreases?
yes, you would need to increase your monthly debit order if interest rates increase. I am not 100% sure about the decreasing rate scenario, but I would imagine if they reset the loan when there is a rate change then it would also affect the installment in the case of a rate decrease.
I have home loan with absa, I am paying extra amount to reduce the term and save on interest, however when I call the bank to capitalise the extra amount my repayment reduces, I asked the bank to leave my installment as it but I was told it’s not possible. Will I achieve my goal with this arrangement?
Check with Absa whether you have an access bond (Absa calls it a flexiReserve). If you have an access bond then you should be able to request the bank to maintain the installment. That would certainly help you pay off the mortgage sooner. If you do not have an access bond, or for some reason they cannot maintain the installment, you can make a voluntary additional payment each month to top it up.
Good day,
Thank you for the information given here. I however have a question regarding my funds in an access bond.
If I still own the R250,000 on my bond, and I’ve deposited through the years the amount up to R250,000 in this access bond. Hence I have the same amount in my access bond as what I still own the bank.
What will happen to my bond and monthly repayment?
Is it a good idea to do that?
Should I contact the bank and instruct them to have my bond paid-up?
Thank you,
Rudi
It is very important to speak to your bank about your various options. There is no benefit to having a credit balance (you deposit more than you owe) on your home loan as you do not earn any interest on the funds. If you have been paying in extra over the years and your outstanding balance is effectively zero, then you will not be charged any interest as you do not have an outstanding balance. You will not need to pay the full monthly installment.
It is important to inform the bank as to what you want to do. If your mortgage agreement still has several years left, then you can leave the facility open. This means that you can still access the R250 000 of additional funds you have paid in. Keep in mind that access to the R250 000 will reduce in line with the term of the loan so that it is zero when your home loan agreement comes to an end after 20 years.
If you have no funds owing there will be no interest paid, but there will be a monthly service fee of around R69. If, however, you draw down on the access bond, your installments will continue.
If you are simply paying off the home loan and not cancelling, no notice is required. If, however, you wish to cancel the bond, then you will be required to give the bank 90 days’ notice of your intention. The bank will then assist you through the cancellation process which involves providing final settlement figures as well as consulting with bond cancellation attorneys, as the bond needs to be cancelled in the Deeds Office. If you are cancelling the bond your attorney will work with the bank to return your title deed to you. Attorney fees will apply.
If you cancel the mortgage bond, you receive back your title deed and close the home loan credit facility. If you ever wanted to take out another mortgage on the property you would have to reapply and register for a new home loan, with all the associated costs.
Yes May, In relation to the F.N.B flexi option you are spot on. The additional funds are available on requests and have no bearing on your monthly installment. The downside is that remaining bond balance will increase proportionally to what you have taken out.
Glad to hear it is working as it is supposed to.
How does one earn interest on the surplus amount in a FNB flexible option bond
If you pay in extra funds to your mortgage then you effectively pay less interest. For example, if your outstanding loan is R200 000 and you have put R50 000 into the access bond, then your net outstanding balance is R150 000 and you only pay interest on the R150 000 rather than the full R200 000.
There is no benefit to pay in more than your outstanding balance – for example if your outstanding balance is R200 000 and you pay in R250 000, you will not receive any interest on the R50 000 that is in excess.
This was a great article, this type of information is almost never fully explained.
Thank you
This might sound silly, but what happens to the surplus funds once your bond is paid up? A colleague mentioned a few days ago that she has been paying an additional few hundred rand into her bond for the past ten years, and has only a few months remaining before it has been paid up.
If there are surplus funds then the bond can be settled early. You can inform the bank and stop paying the monthly installment once the surplus funds match the outstanding balance. You can still keep the facility open by paying the monthly service fee of R69. This means you can still access those surplus funds in the future. But keep in mind anytime you draw from them you create an outstanding balance and you will then need to repay each month.