How does paying extra into your bond benefit your bank?
Use your bonus or any windfall to pay extra into your bond. This is the advice just about every bank in South Africa gives its clients at the end of every year. There are obvious benefits to the consumer: save on interest and cut the life of the loan. But how is this advice good business practice for your bank which earns money on the interest you pay?
The banks fess up.
Albertus van Staden, head of credit at FNB Housing Finance
“Yes, we as a bank do earn less on interest, but it also creates a buffer for a difficult time when customers cannot meet their instalment when unforeseen expenses may arrive.
The extra paid in gives breathing space should an emergency take place to hopefully carry them through the difficult period. Examples include retrenchment and medical expense not paid by medical aid. Hence, to avoid the costly legal proceedings, it may be better to have that buffer.”
Steven Barker, head of Home Loans for Standard Bank SA
“By paying extra into their home loan, consumers will save money by paying less interest over the life of the loan or reduce the period it will take to repay the loan. This advice is not only applicable when consumers receive a bonus or a windfall; it is also advisable to pay in extra on a monthly basis, or whenever possible.
When the customer pays down a home loan faster, the bank will make less profit, yes, but there is the benefit that clients who have prepaid their home loan are better able to absorb life shocks. They can also use the equity built up to purchase a bigger home or provide an underpin to start a business for example. It is always advisable to pay off debt as soon as possible.”
Dawid Malan, head of Strategic Stakeholder Engagement at Absa
“As a responsible lender and with the best interest of the customer, some of the best financial advice a customer can get is to pay off their residential property bond as early as possible.
It is definitely not poor business for the bank as the institution’s main aim is for the customer to be financially secure in all dealings within their financial portfolio. The bank also needs to support customers through the process of paying off their residential property as it allows for the bank to go with the customer into the next phase of their financial journey.
Sound financial advice to the customer is the most important benefit from which the bank can benefit as customers with financial discipline are the driving force behind a healthy banking environment.
During challenging economic times, as with the current market, it is in the best interest of the customer to have a lower monthly instalment commitment on their home loan – this would have a positive impact on the number of home loans payment defaults and/or arrear situations. The customer will also be in a position to consider the purchase of a second property that can be rented out and allow for additional income when reaching retirement.
7 benefits for customers
Improved cash flow based on a lower instalment subsequent to the bonus deposit – thus improving the customer’s monthly disposable income situation.
Payment of less interest over the term of the loan.
Customers can choose to lower the remaining term of their home loan, based on the cash injection, thereby lowering the amount of interest they would be liable for over the full term.
Having a home loan with equity places customers in a stronger financial position – the customer can be viewed as having a disciplined approach to how they handle their finance.
But most importantly, it is sound financial advice to pay off a residential home loan – as this is a journey of wealth creation.
Once the customer’s residential property is paid off or the outstanding balance lowered sufficiently, it immediately opens further property opportunities for customers as, should their financial position allow for it, they could consider the purchase of an investment property that would be rented out – a positive when considering the long-term benefit of the rental property on the customers retirement planning. The second property can generate additional income once paid off.
The customer will also have access to funds that are pre-paid. Therefore, while enjoying the benefits of reduced interest, they can withdraw the funds should they require monies for unexpected expenses.