30 year bond.
For those consumers feeling the financial pinch, taking out a home loan over a 30-year period will immediately lower your monthly bond repayment amount.
While the reduced instalment will give you some breathing room on a month-to-month basis, the downside is that you will ultimately pay more on fees and interest over the long term.
Extending your bond to 30 years can also change your profile as far as affordability is concerned, because the lower instalment could allow you to qualify for a home loan on a more expensive property that you otherwise would not qualify for if you apply for a 20-year home loan.
Tommy Nel, head of credit at FNB Home Loans, says finance-savvy homeowners can use the longer-term bond as a savings facility that they can access when the need arises, through the flexi facility.
Homeowners that use their home loan as a money management tool by transferring additional funds into it when they can afford to pay more on their loan will build up available funds in their flexi facility that they can use to pay for expenses such as school fees, a new car or a holiday, he explains.
A 30-year loan option could help build available funds in this flexi facility quicker, relative to a 20-year option given the lower monthly repayment required.
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If you’re looking to buy property as an investment, then a 30-year bond would be beneficial.
From a tax perspective, an investor taking a 30-year loan would be able to claim the interest on their home loan as a deduction against rental income for 10 more years as opposed to an investor that took up a 20-year home loan, says Nel.
The success of this depends on whether the person satisfies all the necessary requirements for claiming the interest deduction. This means that a 30-year loan option could prove to be more tax efficient than a 20-year loan option, all other things equal.
Because interest rates fluctuate, there’s always the chance that your bond repayment will increase, and at a faster rate than the increase on a 20-year loan.
Your age is also something to take into consideration because taking out a 30-year home loan in your thirties and beyond means you’ll pay off your bond in your sixties.
Carrying that much debt so close to your retirement age can derail your retirement savings plans, as you might not be in a position to be topping up your savings with a bond still hanging over your head.
Nel says you can expect to pay 64% more in interest on a 30-year bond compared to a 20-year bond.
We’d caution property owners around taking out a loan for 30 years, even if at face value it looks more attractive because of the lower monthly instalments offered, he says.
A 30-year loan could work in your favour if you diligently put excess funds into your bond to try to pay your loan off sooner or by investing these savings between 30-year and 20-year instalments into shares, units trusts or increasing your pension fund contributions.
However, if you’re merely using the lower instalments to fund your lifestyle, you need to think carefully about whether this is the best financial option for you.
Author – Thandi Skade
Original Publisher – Destiny Connect