Stay away from 30-year home loans, says bank

The reasons consumers tend to choose a 30-year loan repayment are because of the lower monthly bond repayments, or to purchase a house that is around 10% more expensive than what is affordable to them on a 20 year bond. (Shutterstock).
The reasons consumers tend to choose a 30-year loan repayment are because of the lower monthly bond repayments, or to purchase a house that is around 10% more expensive than what is affordable to them on a 20 year bond. (Shutterstock).
Cape Town - Potential home owners need to look very carefully at the financial impact of the additional interest when taking out a bond over a 30-year period, instead of the recommended 20 years, according to First National Bank. 
 
“On face value, taking out a 30-year bond may look attractive as lower monthly costs appear more affordable,” said Tommy Nel, head of Credit at FNB Home Loans. “However, a 30-year bond will result in a 64% greater interest payable compared to a 20-year option, which no matter how you look at it, is not in your financial best interest.”  

The reasons consumers tend to choose a 30-year loan repayment are because of the lower monthly bond repayments, or to purchase a house that is around 10% more expensive than what is affordable to them on a 20 year bond.

For example, if you buy a home for the property value of R1m, at prime, which is currently at 9.25% on a 20-year loan term, your repayments would be R9 159. If you only pay the minimum installments for the 240 term, you would have paid back R2.2m by the end of the loan term.

Under a 30-year loan term option, your repayment will be marginally less, at R8 227 per month. However, at the end of the term you would have paid back a total of R2.96 million. R764 000 more than the 20 year bond.

“On the 30 year option, your installments will be around 10% lower a month, which amounts to a ‘saving’ of R932 a month,” said  Nel. “There is a possibility, if you are dedicated and invest this towards a long term goal, you may potentially earn a higher rate of return than what you have paid on your home loan.

Risk of long-term payments

“It must however be noted that such a course of action involves much higher levels of risk than the safer option of paying off your home loan sooner,” he said. “If however, instead, these additional funds were spent on consumables on a monthly basis, consumers would undoubtedly be much worse off financially in the long haul.”

While consumers may be swayed by the perceived short-term gain, the hefty interest accumulated as a result of the higher comparable outstanding balance and the over additional 10-year period should be seriously considered when making the decision take out a longer term home loan, said Nel.

After year five on a 20-year Home Loan you would have paid off 11%, whilst only paying off 4% on the 30-year option. After 10 years, you would have paid off almost 30% of your 20-year home loan, whilst having paid off only about 10% of your 20-year home loan. At the point where you would have paid off your 20-year home loan, you will still owe R640k, 64% of your 30-year loan.

FNB does not currently offer 30-year home loans because of these reasons, and would only consider doing so in future if it is able to ensure customers are able to make an informed decision in terms of this as a financing option.
 
“There is very rarely a circumstance that taking out a 30 year bond for your home will be of financial benefit,” said Nel. “Therefore before you jump at the lower monthly repayment option, look carefully at the long term financial impact of taking out a home loan for the additional 10 years.”

- Fin24.


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