Your home loan term: Is 20 or 30 years better?

Article summary

• A 30 year bond means lower monthly repayments with a higher interest rate, while a 20 year bond means higher monthly repayments with a lower interest rate.
• A 30 year bond costs more in the long-term, but leaves more room for additional expenses each month.
• A 20 year bond allows you to build up home equity at a higher rate.

When it comes time to apply for a home loan, the home loan term is one of the key decisions you’ll need to make. In most cases the choice will be between a 20 or 30 year bond, and each has their pros and cons.

Home loan terms: The financial repercussions

Simply put:

• A 30 year home loan term means lower monthly repayments, but higher interest rates.
• A 20 year home loan term means higher monthly repayments, but lower interest rates.

Lenders consider a 30 year home loan a higher risk, hence the higher interest rate.

The 30 year home loan term: Pros and cons

• Pro: Lower monthly repayments gives you more breathing space, leaving room for other household expenses.
• Pro: A 30 year home loan term makes larger, more expensive homes a more realistic option, since you’ll be paying lower monthly installments. Though larger homes attract higher maintenance and utility costs, the lower monthly repayments mean you’ll have more money left over to cover these additional expenses.
• Con: Paying off a 30 year loan could take up the majority of your productive life. For example, if you take out the loan at the age of 35, you’ll be 65 by the time you’ve managed to fully pay it off, leaving you less time to build up savings for a retirement plan.
• Con: The higher interest rates mean you may end up paying more in the long-term than you would have under a 20 year loan term, despite the lower monthly repayments.

The 20 year home loan term: Pros and cons

• Pro: You pay your loan off faster, which is in itself a benefit, leaving you with more time to build up savings and make investments.
• Pro: You build equity faster. Home equity is the portion of your home loan that you have repaid, meaning it’s essentially the portion of your home that you already own. Home equity is an asset that contributes to your net worth. It can increase if the value of your home increases, and you also have the option of borrowing against your home equity, although this can be risky as your home will be used as collateral.
• Con: Higher monthly repayments obviously leave you less disposable income, requiring you to budget more effectively.

The Bond Repayment Calculator

ooba Home Loans offers a free, online tool, the Bond Repayment Calculator, which can be used to calculate your total repayments on a 20 or 30 year bond.

As an example, on a house price of R1 000 000, with a 10% deposit (R100 000) already paid upfront, and the previous South African interest rate of 7%, with a home loan of R900 000, would add up to a total repayment of R2 155 580 on a 30 year home loan term, and R1 674 646 on a 20 year home loan term; indicating the long-term benefits of the 20 year bond.

So which home loan term is the better option?

It would seem that the 20 year bond is the stronger option, saving you in the long-term and allowing you to build up home equity at a faster rate; but the 30 year home loan may be the ideal option if you’re on a tight budget.

Of course, there’s usually no limit on how much you choose to pay on a monthly repayment, so you also have the option of taking out a 30 year home loan, and, when able, paying more into the home loan each month than your actual installment requires. You can then build up equity faster, while still having the option to revert to the lower monthly repayment when your financial situation requires you to slow down.

Applying for a home loan

Whatever home loan term you settle on in the end, remember that ooba Home Loans can help find you the best package out of those available, by applying to multiple banks on your behalf and allowing you to compare quotes, providing the opportunity to save on your interest rates.

They also offer a range of tools that can make the home-buying process easier. Start with their Bond Calculator, then use the ooba Home Loans Bond Indicator to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.