“There are a few instances when having a 30 year bond will benefit property owners. However, while a 30 year bond period may seem attractive it is rarely in the financial interest of a consumer, unless the appropriate level of financial discipline is exercised. One of the times a 30 year bond would be financially beneficial is if the person is investing in property,” says Tommy Nel, Head of Credit at FNB Home Loans.
“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 only took up a 20 year home loan – 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,” says Nel.
Property owners that are financially savvy and use their bond as a savings tool and a cost effective way of borrowing money, could also benefit from taking up a 30 year loan. This could be achieved by paying the amount they would ‘save’ in the form of a lower repayment on a 20 year option vs. a 30 year option as prepayments into their flexi facility.
This would allow them to build up a prepaid amount that they could access immediately should they need the funds. Taking up a 20 year loan and paying only the minimum repayment due on a monthly basis would have meant that no funds would be available to draw from their flexi facility, making the 30 year loan option superior in this regard.
“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. 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,” he adds.
A home loan is one of the cheapest forms of credit a consumer can access because of the loan being secured by the property. This means that using your home loan to fund items or expenses that would have attracted higher rates of interest will save you in the long run. The trick however is to not pay these borrowings off over a 20 year period and then use the ‘savings’ to up your lifestyle. This will have negative financial consequences over the long term.
Nel says 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 afforded to them on a 20 year bond.
FNB has started offering 30 year home loans in response to the needs of our customers, however terms greater than 20 years are only offered to customers that are still able to afford the loan on the 20 year instalment.
“We would 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.
“If you will be diligently putting excess funds into your bond to try and 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, a 30 year loan could work in your favour. However, if you are merely using the lower instalments to fund your lifestyle, you need to think carefully about whether this is the best financial option for you.”
A 30 year bond will result in a 64% greater interest payable compared to a 20 year option and may also be more expensive in terms of the interest rate you will be offered.
“Interest is only ever charged on the outstanding balance of your home loan, whether it is 20 years or 30 years. Therefore, if you can pay more than is contractually required you will bring the total interest down as well as reduce the home loan term,” says Nel.