So you have found your dream home and now, in order to finance it, you approach a bank or other financial institution or originator to obtain a bond over the property. Many consumers are not aware that they have a choice between having a bond repayment term of twenty or thirty years.  Whether or not the 30-year repayment term is a good thing, is still a highly debated issue.
The 30-year repayment term will be enticing to consumers who either want to save on a monthly repayment or who want to buy a home that is more expensive than what they can afford on a 20-year repayment term. It is especially the younger, first time home buyer who find this option appealing as it has a lower monthly instalment.

LET’S LOOK AT THE FACTS:

For the sake of convenience, I will use a purchase price of R2 million. If a prospective buyer obtains a 100% loan at 10,5 % interest over 20 years, he will have a bond repayment of R 19 967.60 and would have paid back a total amount of R4 792 223.46 over the 20 years.

If, however, he had taken a bond on the same interest rate over 30 years, his bond repayment would have been R18 294.79 (only saving him R1 672.81) and the total amount that he would have repaid over the 30 years would be R 6 586 122.92, this an astonishing R1 793 899.46 more than under the 20 year repayment term. This translates to a whopping 37.4% more in total.

A FRIENDLY WARNING:

While consumers may be tempted to opt for the 30-year option and the lower repayment, they must carefully consider the impact on their financial health. As per the example above, paying an extra R1 793 899.46 is in no one’s best interest and should be avoided at all costs.

Consumers often opt for the 30-year repayment term when they want to purchase a home which is technically out of their financial reach. As per the example above, say the consumer has roughly R20 000 per month to spend on his bond, he has the option to purchase the R 2 million property and repay it over the 20-year period or he could purchase a property of R 2 180 000.00 over the 30 year period. This does seem enticing but buying a larger home than you can technically afford also translates into higher additional expenses such as the water, electricity, maintenance and insurance.

Consumers must consider factors such as their current age and the age they will be when paying off the bond as well as variables such as hikes in interest rates and fluctuations in our economy.

IDEAS ON HOW TO PAY OFF YOUR HOME LOAN FASTER

It should be a priority to every consumer to pay off their bond as soon as possible. Paying more than the minimum into your bond account is the best way to pay it off faster and to avoid paying interest. Make additional payments whenever you are in a position to do so by using your bonus at work, “no claim bonus” from your insurance or medical fund and any tax refunds.

Lisa Moore
Conveyancing Attorney
4 October 2016