Beware the massive interest charges on 30 year bonds

By extending a bond repayment period to 30 years, home buyers will end up coughing up huge extra amounts of interest over the term of the bond - making property purchase much more costly than the standard 20 year period.

Mary-Jane Lefevre, Call Centre Manager at MortgageSA says that many buyers are so focused on the lower monthly payments on longer term bonds; they often overlook the full costs of extra interest payments.

"For example, you could end up paying an extra R780 700 on a R700 000 bond with a repayment period of 30 years at a prime rate of 12.5%.

"Although the monthly repayments are R482 less, the additional ten year term adds a whopping great chunk of interest charges."

House prices and interest continue to rise, and have conspired to make affordability harder.

"Lenders have responded by looking at ways to make home loan debt easier to manage like the advent of 30 year bonds that are mostly extended to purchases in the R600, 000 to R850 000 range."

However Lefevre urged anyone considering a longer term home loan to fully understand the implications.

"If an extended term on a home loan is the only way that you can get into the property market then it is worth considering."

"However, we would advise buyers to stress test their budgets and talk to a reputable mortgage originator to ensure that they have researched all the options available to them.

"Depending on your personal circumstances as well as the flexibility of your budget, registering your bond over a 30 year term may be an option you have to consider. This does not mean that you have to settle your bond over 30 years, you can make repayments at the 20 year instalment and have the benefit of falling back on the lesser amount in times of need. In fact we would encourage any client who has even a 20 year bond to increase his monthly instalment and settle the bond earlier thereby saving on interest payments.

Any credible mortgage originator will advise you on how best to structure your term to best suit your personal circumstances taking into consideration your budget as well as your needs and goals.

"If you plan properly and set achievable financial goals, you may then find you are able to pay more towards your monthly installment and shorten the term of payment, thus saving thousands of Rands in interest," she said.

Scenario 1 - 20 year term 

Loan amount : R700,000

Rate (%): 12.5 

Term : 20 years 

Installment : R7,952

Total Loan Cost : R1,908,480

Scenario 2 - 30 year term 

Loan amount : R700,000

Rate (%) : 12.5 

Term : 30 years 

Installment : R7,470 

Total Loan Cost : R2,689,200

i.e R482 less paid per monthly installment for 30 year term, but total cost of the loan increases by R780,720

Hello ooba news

The implementation of the National Credit Act in June this year caused a slowdown in mortgage approvals as banks and applicants adjusted to the new regulations - but now SA's leading originator reports that approvals are returning to pre-NCA levels.

South Africa's largest property listings website has reported a surge in viewings of traditional holiday hot spots as more buyers shortlist homes through online searches ahead of arriving on vacation to see them.

The property market's rapid price escalation has cooled in the last year on the back of higher interest rates and the short term effects of the National Credit Act (NCA), but these factors are conspiring to provide a 'sweet spot' for buyers says SA's leading bond originator.

Property is a worthwhile investment but for younger people hoping to buy it is difficult to take the first step, but not impossible says Rhys Dyer, Chief Executive of ooba, South Africa's leading bond originator that places one in five South Africans in their homes.

"Rather invest in simple, streamlined furniture," she says. "Try to have pieces that have legs and are not boxy. Not only will you have created space but also the functionality of the room improves as well."