Should I put my emergency savings into my mortgage?

Maya Fisher-French
2017-03-26 12:51
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ANDY ASKS:

I have about R155 000 in a money market account as an emergency fund.

I want to pay off my home loan as quickly as possible and am already paying extra into my mortgage each month.

As I have an access bond, would it be a good idea to transfer the R155 000 into the mortgage knowing I can still access it in the case of an emergency?

CITY PRESS REPLIES:

There is an argument that you save more money by keeping your emergency funds in an access bond because you are in effect saving the 10.5% per annum interest on your mortgage and it is tax-free.

It may still, however, be a good idea to keep R20 000 accessible in a money market account for smaller emergencies or unexpected needs which happen more frequently; you don’t want to keep dipping into the bond.

Once you are close to settling the bond, consider keeping the access bond in place with a low balance as this will give you access to capital should you want to make another investment.

Other ways to make your home loan work for you:

TOMMY NEL, HEAD OF CREDIT AT FNB HOME LOANS, PROVIDES A FEW ADDITIONAL TIPS TO HELP YOU MAKE THE MOST OF YOUR HOME LOAN FACILITY:

Pay your mortgage on the day you get your salary.

Interest is calculated daily and capitalised to your home loan monthly.

This means that any additional funds that are put into your home loan, even if it is for a day, will reduce the interest that you will be charged for that month.

Say, for example, you are paid on the 25th of the month, however, your various debt orders amounting to R20 000, including your bond, go off on
the 1st.

By placing the entire R20 000 into your home loan for the five days, this money will work for you by saving interest on this amount of about R29 at your home loan rate of interest for that month, based on a R1 million mortgage at 10.5% interest.

By aligning their debit order dates to fall on their salary date, consumers can also achieve this benefit and ensure that what is probably their most important asset is paid first.

Many consumers are not aware that credits into an account are processed before debits, meaning that you don’t have to schedule your debit orders to only run on the following day.

Having your debit order run on the date of your salary saves you interest in the long run and helps you protect your credit record by ensuring your financial commitments are all settled.

USE YOUR MORTGAGE TO SAVE FOR SCHOOL FEES

There are instances where paying certain costs in full, upfront for an entire year, such as for insurance or school fees, can help generate annualised return on such an “investment” of in excess of 15%, depending on the exact terms of such offers.

Using the facility linked to your home loan and regularly paying excess funds into your home loan can make this possible, whereas funding annual expenses from your monthly salary is something that is probably out of the reach of the majority of South Africans.

For example, let’s assume your annual school fees are R24 000, and you receive a 10% discount if you pay the entire amount before the end of January. You can either pay R2 000 a month, or you can pay R21 600 on the 31st of January, using funds you have saved in your home loan.

The effective return on this would be in excess of 20%.


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