Debating the 20- vs 30-year home loan commitment

The most popular home loan term in South Africa is undoubtedly 20-years because it comes with money-saving benefits on the interest that you will be paying. However, there are pro's and con's to both the 20- and 30-year terms, the decision of which should be based on personal financial goals and financial health.

Many applicants for a home loan focus on the size of their home loan, and ignore the duration of it, and this can prove to be a mistake especially if you have a clear path in mind about how you intend to achieve your financial goals.

Before you make your choice, these pointers will guide you in determining which home loan term is right for you.

20-year

Advantages

• Allows you to build up home equity (the portion of the home loan that has been paid off) at a faster rate. This means that if you need to refinance the property in the future, or may be forced to sell, you'll have the potential of a larger return.
• Lower interest rates may be offered. Loans for this category are considered by home loan banks to be less of a risk than on a 30-year home loan application. It also means there is the potential to earn higher profits in the long-term, as the interest portion of the loan is paid off first.
• Less interest paid. The 20-year home loan will significantly reduce the interest costs paid to the bank over the life of the home loan. This can save tens or hundreds of thousands of rands.

Disadvantages

• Higher repayments mean less disposable income. This can add a lot of pressure to your budget particularly when the interest rate is high. Cash flow is constrained making it difficult to cope with other financial commitments or spontaneous or needed-purchases.

30-year

Advantages

• Lower monthly repayments, which allows you more flexibility in terms of building your savings, and lowering stress on your household budget. Allows you to purchase a more expensive home if the home loan provider can see that you have a greater longer term capacity to meet your home loan repayments.
• Ability to invest more in the home. You can make additional home loan repayments more frequently or invest extra cash into improving the property, adding more value.
• May allow you to qualify for a personal loan, but only if the financier can see that you have excess money in your home loan, and/or personal budget, and that you can meet your home loan repayments.

Disadvantages

• You may be close to retirement once the home is paid off.
• Higher interest rate means you are paying far more for the property than via a 20-year loan.
• Your equity buildup is far slower than the shorter 2-year home loan. This can prove to be a problem if you are forced to sell or refinance your property early.

Things to bear in mind

It is crucial to realise that your financial situation can look very different in 20-, 30-, even five years time. Starting a family can have significant financial impacts on your budget, as do any other investment decisions. And because life is unpredictable, it is very difficult to anticipate all the different scenario's that may result in an inability to service your debt.

There are, however, no rights or wrongs in the duration of the home loan decision. Home loan borrowers should, however, have some confidence in their long-term earning capabilities and regardless of term, attempt to pay more than is required into the home loan account. This will allow for reduced interest costs over time, and more equity ownership. And if you still aren't sure which term is best suited to your needs, speak to a trusted professional financial consultant, who will use scenario planning tools that will clearly define your best option.

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