Pros and cons of extending a home loan repayment term
Owning a home is not only exciting, but it’s one of life’s biggest achievements. While there are many benefits that come with owning your own property, there are equally rising challenges around affordability. Homeowners today are under immense financial pressure due to the high interest rate coupled with the increasing cost of living in South Africa. As a result, a substantial number of consumers are looking for different ways to lessen the financial pressure and stretch their Rands.
Angela Glover, Head of Product at FNB Home and Structured Lending Solutions says, “At FNB, we offer home loans with repayment terms of up to 30 years, but most customers opt for a 20-year term. The benefit of a longer repayment term is that your required monthly repayment is a bit lower than if your term is shorter. However, if you use the full term to repay your loan (i.e. take 30 years to repay without pre-paying) you do end up paying more in total interest over the lifetime of the home loan.”
If we take money management principles into consideration, it is highly recommended that you choose a loan term that fits your budget, and that you try to pay any extra funds that you can spare into your home loan to save yourself interest in the long run. If you have a Flexi option activated, you can withdraw those extra funds should you need them for home improvement or looking into alternative energy solutions for your home to counter ongoing loadshedding.
Glover shares a practical example below of the pros and cons of longer versus shorter repayment terms.
For a home loan amount of R1 million, at an interest rate of 11%, the monthly repayment over 20 years would be approximately R10 321, while over 30 years the monthly repayment would be R9 523. This is a saving of R798 on your monthly cashflow. However, should you take 20 years to repay the loan, you would pay approximately R1 477 252 in total, which includes interest, versus if you repay the same R1 million over 30 years you would pay approximately R2 428 264, an extra R951 112 over the additional ten years.
| Loan amount | R1 000 000 | ||
| Interest rate | 11% | ||
| 20 years | 30 years | Difference if paying over 30 years | |
| Monthly repayment | R10 321 | R9 523 | R798 savings per month |
| Total repayment including interest | R1 477 252 | R2 428 264 | R951 112 extra interest paid |
“Consumers who are financially stretched are advised to relook their budgets and cut unnecessary expenses. If that is not possible, they are advised to approach their banks or financial institutions to find out what their options are regarding home loan repayments,” concludes Glover.
