First National Bank (FNB) have this week highlighted how 30 year bonds can rip off consumers. “On face value, taking out a 30 year bond may look attractive as lower monthly costs appear more affordable, a 30 year bond will result in a 64% greater interest payable compared to a 20 year option, which no matter how you look at it, is not in your financial best interest,” says Tommy Nel, head of credit at FNB home loans.
Consumers typically take out a 30 year bond in order to afford the monthly repayments or to purchase a house that is around 10% more expensive than what is afforded to them on a 20 year bond.
For example, if you buy a home for the property value of R1 million, at prime, which is currently at 9.25% on a 20 year loan term, your repayments would be R9 159. If you only pay the minimum installments for the 240 term, you would have paid back R2.2 million by the end of the loan term.
Under a 30 year loan term option, your repayment will be marginally less, at R8 227 per month. However, at the end of the term you would have paid back a total of R2.96 million. This is R764 000 more than the 20 year bond, points out FNB.
“On the 30 year option, your installments will be around 10% lower a month, which amounts to a ‘saving’ of R932 a month,” says Nel.
But Nel feels the money would do better elsewhere: “There is a possibility, if you are dedicated and invest this towards a long term goal, you may potentially earn a higher rate of return than what you have paid on your home loan. It must however be noted that such a course of action involves much higher levels of risk than the safer option of paying off your home loan sooner. If however, instead, these additional funds were spent on consumables on a monthly basis, consumers would undoubtedly be much worse off financially in the long haul.”
Nel adds that with a 30 year loan it can take a while to pay off the capital of the loan as the interest is so high. “After year five on a 20-year home loan you would have paid off 11%, whilst only paying off 4% on the 30-year option. After 10 years, you would have paid off almost 30% of your 20-year home loan, whilst having paid off only about 10% of your 20-year home loan. At the point where you would have paid off your 20 year home loan, you will still owe R640k, 64% of your 30 year loan,” he illustrates.
FNB says does not currently offer 30-year home loans because of these reasons, and would only consider doing so in future if it is able to ensure customers are able to make an informed decision in terms of this as a financing option. Nel did admit that under exceptional circumstances the bank has offered customers that experience some financial strain the ability to extend their loans past 20 years. “But this constitutes less than 2% of our outstanding loan book,” he adds.
30 Year bond not a ‘wrong call’ for everyone
Rival Standard Bank confirmed that it offers 30 year bonds to customers while Absa says on the home loan section of its website that it offers ‘flexible repayment terms of up to 30 years’. Meanwhile, Nedbank’s website says that ‘You can pay off your home loan over a period of up to 25 years’.
Steven Barker, head of home loans for Standard Bank, says that 30 year home loans are not a ‘wrong call’ for everyone. “Standard Bank primarily offers 20 year loans but we are happy to see special requests form customers for 30 year applications subject to certain credit criteria. Thirty year bonds give customers affordability and a leg up on the property ladder. This product assists a small portion of the population.”
Barker points out that nothing prevents consumers from paying off their home loan more rapidly and that the bank is open to lenders asking for their loan term to change to 20 years. “The 30 year bond is more expensive but there’s nothing stopping customers form paying off their loans more aggressively by paying, say 5%, more on their repayments or adding in lump sums. They can also apply for access bonds which will allow them to pay in more and take out the money again if they need to.”
*Absa and Nedbank were approached for comment and Justmoney will add their responses as soon they are provided to us.