The home loan term is one of the key decisions you'll need to make. The choice is usually between a 20 or 30 year bond, so here are the pros and cons of each.
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.
FAQs
There are plenty of good reasons to take out a 20-year mortgage: You'll save money on lifetime interest compared to a 30-year loan. Because you'll pay your 20-year mortgage off in 10 fewer years, you'll spend a lot less money on interest. You can use a mortgage calculator to see how much savings you'll reap.
Is a 20 or 30-year loan better? ›
If your goal is to build equity in your home more quickly, the 20-year mortgage is a better option. With more equity, you increase your financial net worth, can take out a more substantial home equity loan and can tap into greater equity for another mortgage or other financial pursuit.
What are the disadvantages of a 20-year mortgage? ›
However, one disadvantage is that the monthly payments on a 20-year mortgage are higher than those on a longer-term loan, which could strain your cash flow and budget. The higher monthly payments may also limit the amount of money you have available for other investments or savings goals.
Are 30-year mortgages a good idea? ›
Most homebuyers choose a 30-year fixed-rate mortgage, but a 15-year mortgage can be a good choice for some. A 30-year mortgage can make your monthly payments more affordable. While monthly payments on a 15-year mortgage are higher, the cost of the loan is less in the long run.
Why is a longer loan term better? ›
One big advantage of long-term capital is it comes with higher funding amounts than short-term loans. Since you're repaying the loan over a longer period of time, your monthly payments are spread out and more manageable. However, they often come with more stringent financial requirements.
Is it better to have a longer loan term? ›
Since lenders charge interest payments monthly, a longer loan term inherently means more interest payments. Taking on a personal loan with a shorter term will help you save on interest charges (at the trade-off of having larger monthly payments, of course).
At what age should you no longer have a mortgage? ›
The same is true when it comes to paying down your mortgage. To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.
Is it smart to buy a house at 20 years old? ›
There's no minimum age to buy a house. If you're ready and have a down payment, buying a house in your early 20s is a smart move.
How many years is best for mortgage? ›
Choosing a 25-year term will be cheaper in the long run, but make sure you can afford the higher monthly payments. If a shorter term makes repayments too expensive, consider the longer 30-year term.
Is 50 too old for a 30 year mortgage? ›
If you can demonstrate an ability to repay the loan before you're 75 years old, they will consider your application no matter your age! For example, if you needed to borrow $300,000 and were 50 years old, the standard 30-year mortgage term could be reduced to 25 years and your loan would be approved.
A: Dave Ramsey recommends a 15-year, fixed-rate conventional loan.
Why does it take 30 years to pay off $150 000 loan? ›
Answer and Explanation: The interest rate on a loan directly affects the duration of a loan. Note: The interest rate is calculated using the hit and trial method. Therefore, it takes 30 years to complete the loan of $150,000 with $1,000 per monthly installment at a 0.585% monthly interest rate.
Why do people do 30 year mortgages? ›
Home buyers tend to prefer 30-year fixed-rate mortgages. Here are some of the advantages they provide: Lower monthly payments: A 30-year mortgage spreads out the cost of your home over the 30-year term, giving you additional time to pay the loan back.
Why choose a 30 year mortgage? ›
Pro: Lower Monthly Payments
The 30-year mortgage has consistently been the favorite among homeowners for its low monthly payment. Though more of your money goes to interest and you pay for twice the length of time compared to a 15-year term, the advantages of a lower monthly payment can't be ignored.
Why do people take out 30 year mortgages? ›
Because a 30-year mortgage has a longer term, your monthly payments will be lower and your interest rate on the loan will be higher. So, over a 30-year term you'll pay less money each month, but you'll also make payments for twice as long and give the bank thousands more in interest.
Why are 30-year mortgages the most popular? ›
Nowhere in the world is the 30-year fixed-rate mortgage as popular as it is in the US — and for good reason. Fannie Mae (created in 1938) and Freddie Mac (1970) made the 30-year fixed-rate mortgage popular in the US, because they would buy mortgages from banks, offloading both their rate and default risk.
What is one advantage to a 30-year mortgage? ›
Pros of a 30-Year Fixed Mortgage
Low monthly payments: Assuming identical principle balances, a 30-year fixed-rate mortgage offers the lowest monthly payment among traditional fixed-rate loans.
What are the benefits of a 20-year mortgage? ›
Pros of a 20-year mortgage
By saving about 0.25% to 0.40% on your rate and paying off your home loan 10 years faster, you'll pay much less in interest compared to a 30-year loan. You'll build equity faster: You'll have to pay more in principal each month to pay down your loan over 20 years instead of 30.
Is a 20% loan bad? ›
A 20% APR is not good for mortgages, student loans, or auto loans, as it's far higher than what most borrowers should expect to pay and what most lenders will even offer. A 20% APR is reasonable for personal loans and credit cards, however, particularly for people with below-average credit.
