How interest is calculated:
The interest charged on a home loan is calculated on the daily balance owing on the loan.
This interest amount is added together for the month (in an interest accrued account) and once a month the total of the daily interest amounts for the month are debited to the home loan.
This means that if you pay extra money into your home loan then the balance owing reduces and you are charged interest on the lower amount. You therefore get an immediate benefit for paying extra money into the home loan.
An “Access Bond” Facility:
Most banks will offer an Access Bond facility which means that a person can pay extra money into his / her home loan and then can access this extra money at a future date if needed.
This is an excellent facility as it means that a borrower gets the benefit of paying extra money into his home loan, but can also know that the extra money is available if needed.
Proof that it is beneficial to pay extra money into a home loan:
The following calculation will demonstrate that it is worthwhile to pay extra money into a home loan:
Person “A” has R100 000 and pays this into a savings account at the bank pays interest at the rate of 0.75% per annum. This person will earn interest for the year of R750 and will need to declare this interest as income earned when submitting his annual tax return.
Person “B” also has R100 000 but she pays this amount into her home loan. Her home loan interest rate is 9.5% per annum. This person saves herself from paying interest of R9 000 for the year (because her home loan balance was reduced by R100 000). She does not have to declare this saving in her tax return as she saved herself from paying this interest and did not earn the interest.
It can be seen that person “A” benefits by R750, whereas person “B” benefits by R9 000 with no tax implication.
As shown in the example mentioned above, it does make sense to pay extra money into your home loan.
If you are not sure how this affects you, we’ll be happy to share some further thoughts with you related to your personal situation. Contact us right away for a no-cost, no-obligations and no-pressure chat.