It is crucial for all homeowners to understand the key differences between a 20 year and 30 year home loan. There are pros and cons to each term and deciding on the right one could save you thousands of rands in the long run.
The most important aspect to consider is your current financial situation and how your new bond will affect this. Make sure that you do not overcommit yourself and always make provision for possible interest hikes should they occur. Remember that there is no right or wrong choice when it comes to choosing your term.
In short, a 20 year home loan comes with a larger installment than a 30 year home loan. Due to the fact that your loan is paid off in a shorter period, you will incur less interest.
To give you an indication of the financial implications of your home loan we have used a R1 000 000.00 bond with an interest rate of 10.25% as an example. The monthly repayment over 20 years will be R9 816.00 whereas the repayment over a 30 year period would be R8 961.00. The monthly payment difference would therefore be R855.00.
While a lower repayment may seem attractive at the time, it is important to calculate the difference in the total amounts paid back.
Using the same example the total repayment over a 20 year period will be R2 355 840.00 and
R3 225 960.00 over a 30 year period. The difference is a whopping R870 120.00! These calculations have not taken into account possible interest rate increases or inflation.
Should you be in a position to afford a 20 year payment plan, this is definitely the way to go. As the saying goes, “make a short term sacrifice for a long-term goal.”