The Power of One
Albert Einstein is credited with saying that compound interest was the most powerful force in the universe and the new consolidated accounts tap into this power. This type of account is making waves in the housing and finance industry. Previously only the domain of the private bank client this product is now becoming accessible to the man in the street. The concept of the consolidated loan account is simple. Instead of a separate account for your bond and cheque, combine them both into a single account. Here all your assets are valued and a single loan underpinned by a bond is extended to the client.
The power of interest
This has certain advantages, most importantly the way that interest is calculated on a bond. The interest on a bond is calculated on daily balance while this interest is capitalized or added to the outstanding amount monthly. By keeping your salary in this account, you can keep the average balance of this account substantially higher than it would normally be in a bond account.
Equally, instead of earning a miserly interest on your cheque account, you can now save, as opposed to earn, a respectable close-to-prime amount. Another advantage is that this saving is tax free while the interest earned on the savings or cheque account would attract tax at a certain level.
A small caveat
There are adverts currently advertising the substantial savings that can be had by making use of this facility, but there is a caveat. And its not such a small caveat. The consolidated loan is across all assets. That means that you might be paying off your car over the 20 year term of the bond. If you do this you'll be paying just as substantially more than you would on a normally amortised car loan.
A bigger caveat
The weakest part of this type of facility is human nature. The ease of access to these funds can be a huge downside to you if you're not disciplined. If you keep dipping into this loan account and running at the max as a lot of South Africans do, you will never really get the benefit of the saving, as it will be spent every other month.
This is a brilliant product and can have huge benefits but it does require financial intelligence in the way that you use it. The banks provide for different payment options and some are structured to help you with the discipline needed to avoid accessing the extra money too easily. Make use of these extra checkpoints so that you don't end up in the poorhouse.
Article by: Dave Welmans - (www.thepropertygame.co.za)