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Saturday, September 1, 2007
All for one…..

The so-called ‘One Account’ facility where you put all your eggs in one basket, so to speak, is certainly very convenient and cost-efficient. Such accounts are becoming quite popular, although they are still only available to a limited segment of the market. Banks have adopted various names for the concept, including ‘single facility’, but they all essentially operate the same way.

Your cheque account, credit card, mortgage bond, and even your business account, if you have one, are all combined into one account with one account number. It is usually secured by the prime residence.
In providing for debt consolidation the facility minimises overdraft costs through a fluctuating balance based on daily cash flow, credits and so on. Reconciliation is easy, and you only get one bank statement, of course. Even credit card transactions are treated as ‘debit card’ entries. Amounts come straight off your account, so no problems with authorisations, and no need for any monthly statements with settlement amounts. The credit card can usually double as an ATM cash card as well. If you take the fixed fee option there is no charge for such transactions either, no matter which machine you use. You can also operate a ‘Garage card’ on the account if you want.
All sounds wonderfully convenient and easy – and it is. But there is a catch, and it concerns debt management.
With a traditional mortgage bond you are advised of the regular payment required each month and this is debited from your cheque account and credited to your bond account. For example, for a loan of R500 000 on a 20-year mortgage bond you might be expected to pay R6 036.87 per month. This would ordinarily be debited to your cheque account and credited to your bond account. The bank will ensure this happens each month and a statement will show your reducing balance.
But what do you do if the loan is on the same account as your cheque account? How do you ensure you reduce the balance? There will probably be a minimum credit required, as notified on your bank statement. But how can this be monitored when normal monthly debit transactions flow through the account and screw with the balance?
I tried to ask several banks about this. But after six months or so of digging around, having enquiries deflected to unhelpful personnel, or in some cases simply not having my calls returned, I’ve come to the conclusion that no one actually has an answer. Maybe the banks are so keen to lend they don’t really care about the loan being repaid? Just so long as the account reflects a healthy cash flow they seem disinterested in helping the client.
It reminds me of the days Insurance Times & Investments used to explain and promote the benefits of accelerating your bond repayments (around 1990) an idea the banks largely ignored at the time because, again, they didn’t really want the loans repaid. Nowadays the idea has gained sufficient momentum for some banks actually to use the concept it their marketing. Anyway, back to our dilemma.
The solution is pretty tricky, and not perfect. First of all, use an amortisation table to calculate a normal bond account based on your loan, interest rate and term. For an existing mortgage bond simply enter the original inception date. You can download a calculator from a range of free sources. For example, Microsoft has a spreadsheet one for its Excel program or you can find one on a local bank or life assurance site.
Add another column to the spreadsheet headed ‘bank balance’ or ‘one account’ or something. You will enter your actual balance in this column each month.
Next, for those on monthly salaries, use the balance the day before payday as your yardstick. Enter this in the spreadsheet column each month. You can then compare how you are doing. Each month the One Account debt must not exceed the amortised account balance. If it does you should take corrective action the following month to reduce your budget accordingly.
For those running a business it is even trickier. You can still use the amortisation guide but at what point in the month do you set a comparative balance? It is really up to the individual; maybe choose the lowest balance each month and compare it to the schedule.
The question that really concerns me is this one: how does the bank identify a client who is getting into financial difficulty? If he is required to make a minimum payment of, say, R10 000 this is pretty meaningless if his turnover is a million a month. That alone fulfils the minimum requirement but it doesn’t say anything about when or whether the debt will ever get repaid. By Nigel Benetton

Copyright © Insurance Times and Investments® Vol:20.8 1st September, 2007
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