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30 Year Home Loans

30 Year Home Loans - Are they wise?

When you buy your first house and take out a bond to finance the deal, the bank will offer you a product with various options. One of the choices you need to make is the period of the loan. You can pay back a home loan over a period of 15 to 30 years. Most people opt for a 20 year loan but the maximum period allowed is 30 years. Nothing stops you from paying it off earlier, there is no minimum laid down period.

If you are young and buying your first house you will probably be looking for the lowest monthly installment you can get. The current interest rate and the period of repayment will determine what your monthly repayment will be. The longer you take to repay a loan the smaller the monthly repayment, so you go for the maximum of 30 years to save some money on your monthly budget. Good choice? Very bad choice!

On long term debt, such as a home loan, the amount you will pay in interest over the period will be much more than the capital you borrowed in the first place.

Let’s do the math:

On a loan of R350 000 at 15.5% over 20 years your monthly installment will be = R4 738.
On a loan of R350 000 at 15.5% over 30 years your monthly installment will be = R4 566.

You will pay R172 less monthly over the 30 year period. What can you do with R172 extra a month?

Now, after 20 years you would have paid R787 259 in interest!

Over 30 years you would have paid R1,293 691 in interest!!

By paying off your home loan over 20 instead of 30 years you will save R506 432!!!

Just think how much you will save if you pay another R100 extra each month. 30 years is a long time, a very long time. On the other hand, ask anyone who is near retirement age how quickly the time has passed and how sorry they are that they did not pay their home loan off sooner.

With all the advances in medical technology and living healthier lifestyles people can enjoy life for much longer. Make it one of your top goals in life to retire debt free. Despite the turmoil in financial markets and the relative drop in property prices over recent months, property is still your best investment, look after it.

If your home loan is much bigger and the rising interest rates has made it impossible for you to keep up, you may consider extending the period to 30 years to bring down your monthly payments for the time being. As soon as the situation improves it would be in your best interest to revert back to the shorter term and pay extra every month.

As previously said, any additional money you pay into your home loan will save you interest and reduce the time it will take you to pay back the loan. It makes sense to pay any extra money you may have into your bond. You can even use it as a savings account as the extra funds, over and above your normal repayments, will be available for you in times of need. You will have to apply for a re-advance or an access facility on your home loan account to gain access to the funds.

You should also consider taking out mortgage protection insurance. This will ensure that the balance of your loan is fully paid off when you die and your legacy will be a leaving your loved ones a bond-free home.

The question we asked in the beginning was: Is it wise to take out a 30 year home loan? You answer that.

To conclude

And in the end, it's not the years in your life that count, it's the life in your years. ~Abraham Lincoln ~

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