MONEY CLINIC: What kind of mortgage loan should I take and why?


QUESTION: I am looking to buy a house and have been offered a number of bonds (mortgage loans). Some have a 20-year term and others a longer one. Is there a reason I should choose the 20-year bond rather than the 30-year bond?

The monthly repayments on the 30-year bond are lower, but I see the total amount to be repaid is higher. Which is better? Will I get penalised if I pay off my bond before the due date?   

ANSWER: We talked to people experienced in buying property with mortgage loans, as well as experts working at bond originators, and their recommendations can be summarized as follows: Assuming that you are disciplined and responsible with the payment of loan obligations, choose the biggest bond (that you can get approval for in terms of your income and the valuation of the property), with the lowest interest rate and the longest payback term possible.

Bond originators like Betterbond and Capcubed Home Loan Experts, who bargain on your behalf with banks and other mortgagors for the best deal, can help getting approvals.

The bigger the bond, the smaller the deposit will be that you’ll have to pay.

A smaller deposit means more money available for extra costs when buying property, like paying lawyers for registration and transfer cots, moving house, new insurance etc.

And the lowest interest rate obviously means saving costs. A difference of only half a percentage point (0.5%) in the interest rate can, over a period of 20 years, mean a saving of more than a R100 000 on a loan for an average entry level house. 

The longer term will lower your monthly payback obligation and thus might enable you to get a bigger total loan approved. This is because the total bond amount approved depends, among other things, on the limited percentage of your monthly income creditors are allowed to take into account for repayment of the loan. 

A longer term and lower obligated monthly repayment installment also gives you a bit more leeway when your income comes under pressure or you have extraordinary expenses. 

But, as the reader noted, a longer payback term means more total interest costs. Therefore remember this “absolute must”: Always pay back a bond as fast as possible, thereby shortening your payback term and saving huge amounts on total interest in the end. 

As with savings the phenomena of compound interest  - or the growth of the value of money over time - can earn or cost you incredible total amounts. 

Bonds are normally quite flexible debt instruments with no penalties for paying back early, paying extra amounts that may become available or increasing the monthly installments. The interest is normally calculated monthly on the outstanding balance. 

Therefore every extra R1 paid back will save you money in the end.

For example, paying back a mortgage loan in 15 years rather than over the full term of 30 years, can literally save you the price (or at least the deposit) on another house. But don’t close and deregister the bond account before the full term has expired.

Keep it open as a handy available credit facility. Usually, if you’ve paid off a bond faster than the contract term, you can easily apply for a re-advance if you need money for another big purchase. The money can be available within days after your application was received.  

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