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Why a 30-year bond is tough to justify

Many home buyers are faced with the predicament of short-term relief versus long-term financial benefit. This is especially true when the bank offers a 20-year loan repayment term or one over 30 years. On the surface, however, the monthly benefit really does not justify the additional interest paid over the extra 10 years.

In fact, according to Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, over 30 years buyers will pay around 8.3% less on their bond each month but will end up paying 64% more interest than they would on a 20-year bond term.

“If a buyer purchases a home for R1m at prime, which is currently 10.5%, on a 20-year bond term, the repayments will be R9,984,” says Goslett. “If the buyer makes no additional payments into their bond account and pays the minimum instalment over the 240-month term, they will pay back a total of R2, 396,112, of which R1,396,112 is interest.

“If the buyer purchased the same property over a 30-year bond term, their monthly bond repayment would be R9,147. Again, if they made no other payments other than the monthly instalments, they would have paid back a total of R3,293,061. In this instance the interest paid over the term of the loan is R896,949 more.”

A question of making ends meettime-up

Home prices have seen an upward trajectory over the past few decades, while salaries have not followed suit, says Goslett, noting that getting into the property market has become more difficult for younger generations, which is why many buyers tend to choose a longer-term bond option.

“Affordability is an issue for many South Africans who are forced to find ways to cut down on repayments to get by; however it comes at a cost over the long term,” he says. “If the money saved on the monthly repayment is used to pay off other short-term debt or is spent on an interest-bearing investment with a higher return than the additional interest paid on the longer bond term, it might be a worthwhile endeavour. However, if the money is spent on consumables each month, the buyer will be in a far worse financial position in the long run.

“Prospective buyers might be convinced to opt for a 30-year bond due to the perceived short-term gain, but the accumulative effect of the additional 10-year period should be carefully considered before any final decision is taken. It is imperative that the pros and cons are carefully weighed up and an informed decision is made.”

Two easy (and one not-so-easy) ways to kill the interest on your bond


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  • Tatenda 18th September 2016

    Insightful. Most folk who opt for 30 year bonds are borrowing right at their limit to satisfy buying something that they like.A way around it would be to opt for a thirty year bond then pay it off as if you took a 20 year one or even less. This will have two distinct advantages. In times when one does not have as much cash to pay the monthly instalment, there is the option to pay less without falling foul of the loan agreement-with a 20 year bond, one is locked in a fixed high instalment. The second advantage is that by paying extra into the bond, depending on the loan agreement, one can have access to the ‘extra’ funds if one gets to an emergency. All this requires a reasonable amount of discipline which is not too onerous for the average borrower.