In South Africa, a financial adviser explained the benefits of keeping reserves in an access bond
In South Africa, part of an emergency fund can be held within an access bond to reduce the amount of debt on which a bank charges interest for a home loan. This approach can be financially beneficial, but requires strict discipline because the funds remain available for withdrawal, Daily Maverick reports.
Interest savings
Independent financial adviser Kenny Meiring gave the example of a borrower with mortgage debt of 1.5 million rand and emergency savings of 200,000 rand in a money market account. If this money is paid into an access bond, the bank will effectively charge interest on a smaller outstanding debt balance.
At a rate of about 10% per year, 200,000 rand could save approximately 20,000 rand in interest over a year. This indicative calculation does not take into account the gradual reduction of the loan principal and other technical factors.
According to the adviser, such savings differ from receiving interest income: the borrower avoids an expense rather than receives income paid by the bank. He noted that money saved on interest is not taxable interest income, while interest on ordinary bank deposits may be taxed after the annual tax-free threshold is exceeded.
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The risk of spending the reserve
The main drawback of the strategy, according to Meiring, is behavioral. A reserve held in a separate account is easier to perceive as money intended only for emergencies. By contrast, an amount displayed in a banking app as available within a mortgage may seem suitable for a holiday, buying a car, furniture, or renovations.
The adviser called this an example of mental accounting: people treat the same money differently depending on the category to which they mentally assign it. Therefore, a reserve held in an access bond should be mentally clearly separated from funds for non-essential spending.
Before paying the entire reserve amount into a mortgage, Meiring advises checking the terms of the specific banking product. Rules for access to funds vary among banks and loan types, and certain conditions may apply to withdrawing money.
