Bond Statement vs Amortization Table

There are many home owners who find it difficult to reconcile the entries reflected on their bond statement with an amortization table. We therefore decided to complete a case study comparing the bond statement calculations to standard amortization table calculations and report on the differences in methodology.

We will start off by referring to the Excel spreadsheet used in this case study - click the Bond Statement Case Study link to open the spreadsheet - it will be simpler to refer to the spreadsheet while we explain our findings.

The spreadsheet contains 5 sheets named summary, intdiff, bond, bond2 and amort. We started by creating the bond sheet where the details pertaining to our example were entered. Please note - cells highlighted in yellow can be amended to perform one's own calculations, while cells highlighted in blue contain formulas and should not be amended.

Let's start by looking at the amort sheet. The calculations on this sheet basically represent the same calculations as per an amortization table, but the format in which it is summarized is as per a typical bond statement. An important aspect to note is that the monthly debit order / payment amount includes the monthly insurance premium and bank admin fees. All input variables are taken from the bond sheet and should therefore not be altered on this sheet.

You will also notice that the interest calculated is based on the amortization table calculation and is therefore not dependent on the number of days in the specific calendar month. These amounts can be recalculated by using our Amortization Table which is part of the bond calculator service. Click here to open the Calculators in a separate window.

Now refer to the bond sheet. You will notice an additional column for interest days. The common practice is for banks to calculate bond interest based on the closing balance at the end of each day. The interest is then accrued and added to the bond statement, usually on the last day of the month. A difference in methodology therefore exists between the method used by the banks to allocate interest to a bond statement and the typical methodology used in amortization table calculations.

An amortization table calculates interest based on the repayment periods specified which in most cases would mean that a calendar year is split into 12 interest periods. There could therefore potentially be a difference between interest charged by the bank and calculated through using an amortization table.

Another factor to consider is that banks usually base their calculations on a 365 day year. This will also result in a discrepancy because most bonds will be affected by more than one leap year. The banks will however charge interest on the 29th day of February in a leap year and it therefore results in another discrepancy.

Obviously this methodology would never have been followed by the banks if the resulting discrepancies were significant and could result in their customers being dissatisfied. Refer to the summary sheet for a moment - the first three columns represent the summarized findings from the amortization table, while the next three columns represent the findings from the bond sheet.

You will notice that the interest difference is minimal and also that this difference will change when different bond starting dates are used on the bond sheet. This can be attributed to using a 365 day year and the relative position of each month in relation to the leap year month. The interest differences for the entire leap year cycle have been listed below the summary table and a chart has been included in a separate sheet (intdiff sheet).

Our findings at this stage is therefore that even though banks charge interest using a different methodology than what is used in an amortization table, these differences are minimal and home owners should not be concerned about this issue even though we do recommend reviewing your bond statement in detail!

We based the calculations on the bond sheet on a bond repayment date on the first of every calendar month. You will therefore notice that the debit order / payment amount is deducted from the outstanding balance on the 1st of every calendar month. Please also note that the difference between this amount and the monthly interest represents the capital repaid on the bond on a monthly basis.

Part of the reason why we completed this case study is that we suspected that a home owner would pay more interest if banks calculated the bond interest on a daily basis and this method of calculation was not in line with the methodology used in calculating monthly bond repayments. Refer to the bond2 sheet.

The only difference between the bond statement calculation on this sheet and the calculation on the bond sheet is that we provide the facility to change the repayment date and incorporate this date into the daily calculation of interest. You will therefore notice that the repayment date cell is highlighted in yellow and can be amended to a specific repayment date applicable to a bond.

When the repayment date is not on the 1st day of a calendar month, it will basically result in the bank charging additional interest from the 1st day to the actual repayment date on the capital which is still outstanding. The later repayment date cannot be taken into account when the monthly bond repayment is calculated and it therefore means that the capital amount which is repaid on a monthly basis will be less. The bond amount will therefore be repaid more slowly and interest charged on the bond will be higher.

Using an amortization table based calculation as we did, you will notice that a capital balance will remain outstanding at the end of the bond period which is reflective of the additional interest being charged and the capital being redeemed more slowly.

Refer to the summary sheet - the last four columns relate to this calculation and the total of the last column represents the additional interest paid. In this example, the effective interest rate associated with a monthly repayment date of the 10th of each month is 0.40% on top of the bond interest rate specified.

Our conclusion is therefore that even though there are cash flow benefits derived from postponing a monthly bond repayment, home owners should realize that it could result in a higher effective interest rate associated with the bond. We would therefore recommend that bond repayments should be scheduled at the start of a calendar month in order to avoid additional interest being incurred.

Please note: when a bond repayment is scheduled on a later monthly date, it will not necessarily mean that there will be an amount outstanding at the end of the bond period as the monthly bond repayment is recalculated every time the interest rate is amended. This generally occurs when the prime lending rate is adjusted by the Reserve Bank. The adjusted monthly repayment is calculated based on the outstanding capital balance at the date of the rate change and the effect of the additional interest is therefore less apparent in practice.

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