Here’s when you should ask for a 30-year bond
FNB introduced 30-year bonds in July this year, while Absa has had up to 30-year bonds in place for its customers for more than 15 years; Nedbank offers a maximum of 25 years on its loan terms while Standard Bank gives its customers the option of either 20- or 30-year home loans.
Last month HomeTimes said a 30-year home loan was tough to justify when one considers the 64% more interest paid over the 30-year term for an 8.3% saving in the monthly instalment.But, if used wisely, a 30-year bond can be one of the most intelligent decisions you will make when signing the bank’s offer.
“Property owners who are financially savvy and use their bond as a savings tool and a cost-effective way of borrowing money, could benefit from taking out a 30-year loan,” says Tommy Nel, head of credit at FNB Home Loans. “This could be achieved by paying the amount they would ‘save’ in the form of a lower repayment on a 20-year option versus a 30-year option as prepayments into their flexi facility.”
This allows the homeowner to build up a prepaid amount that can be accessed immediately, says Nel, noting that a 20-year loan where only the minimum repayment is paid monthly will not afford them this benefit.
“This makes the 30-year loan option superior in this regard,” he says. “Homeowners who 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 up available funds in this flexi facility quicker, relative to a 20-year option given the lower monthly repayment required.
“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.”
Bleeding to the competition
Nel says the reason for FNB launching a 30-year bond product was due to a number of its own customers choosing to take longer-term home loans with competitor institutions, despite being able to still afford the loan on a 20-year basis.
“Sometimes they were even happy to accept a slightly higher interest rate at the competitor,” he says, noting that the bank’s greater-than-20-year loan offering is designed to meet the needs of the customers who can still afford the loan on a 20-year basis, but choose a longer term because of some of the financial flexibility it brings, thanks to the lower instalment. “When approving loan terms in excess of 20 years we help customers understand the potential consequences of this choice of their lifetime interest bill so that they can make an informed choice.”
Since launching 30-year bonds, Nel says the majority of their applications are coming from buyers in the Western Cape.
“We have seen the biggest demand for 30-year finance in the Western Cape, which is not altogether surprising given how strong the house price performance has been in the Western Cape over the last number of years, quite materially outperforming the other eight provinces,” he says. “We have seen the lowest demand for greater-than-20-year loan options from the Northern Cape and Gauteng.”
Absa’s default is a 20-year home loan, but does extend the loan term to 30 years in exceptional circumstances, such as where a customer is experiencing difficulty in keeping up with the repayment.
This is according to Ewald Kellerman, chief risk officer for mortgages at Absa Retail and Business Bank, who says in some instances Absa would allow the loan to be restructured to repay over 30 years in an attempt to provide financial assistance to the customer.
“Where the customer is unable to afford a 20-year term, we do not automatically solve for 30 years, he says. “Applications would only be considered on merit to increase the term. In general, however, we do not believe that a 30-year term is in the best interest of the customer and therefore do not actively market 30-year terms.”
In a statement to HomeTimes, Standard Bank says, “While the instalment on a 30-year term is lower as opposed to a 20-year loan, the interest paid over 30 years is higher. It is in the interest of a customer to pay off the bond as soon as possible, irrespective of the loan term. Prepaying one’s bond will substantially reduce the interest paid and the subsequent term. Therefore, take the time, do the homework and understand the dynamics of each term and how they may affect your financial position. This will save you both money and time in the long run.”
According to Yousuf Bhyat, spokesperson from Nedbank’s Home Loans Product Innovation and Development department, Nedbank offers home loans up to 25 years.
“However, the majority of our clients prefer paying their bonds over a 20-year period,” he says.
Financially savvy investors should also keep in mind that a 30-year loan would enable them to claim the interest on their home loan as a deduction against rental income for 10 extra years, says Nel. “The success of this depends on whether the person satisfies all the necessary requirements for claiming the interest deduction,” says Nel. “This means that a 30-year loan option could prove to be more tax-efficient than a 20-year loan option, all other things being equal.
“If you will be diligently putting excess funds into your bond to try and pay off your loan 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.
“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 down the total interest as well as reduce the home loan term.”
Absa’s 30-year vs 20-year loan pro’s and cons
|The monthly repayment is lower over 30 years compared with a 20-year term, which will benefit a homeowner’s monthly cash flow. However this amount is fairly small.
|The total amount in interest paid is significantly more over 30 years compared with a term of 20 years, which will have the effect that the homeowner eventually pays more for the property.
|If the term of the loan is less than 20 years, the amount of interest owed will be far less due to the reduced term. The monthly instalment, however, will be quite high.
|Over the full term of the loan, the capital repayment would be the same, however, a 30-year term would be more expensive in terms of interest.
|Regardless of the term, prepayments would allow you to settle your home loan faster than the contractual rate, reducing the total amount of interest paid.
|A monthly payment on the 30-year loan would have a smaller portion of capital repayment and a larger interest portion.
|Interest rate changes will have a larger effect on the repayment amount on a 30-year loan compared to a 20-year loan due to the higher proportion of interest in the instalment.