Article by Veronique Jackdaw
It is possible to request and extended period home loan, which mean that your monthly repayments are lower, but take place over a longer period of time. This lower payment is due to the fact that the amount owed is spread out over a longer time span. Sounds good does it not? But is it really all that economical?
True, you do pay less each month than on a standard home loan (20 year loan), but you are also making less of a dent in the balance than on a standard home loan. This means that you end up paying more interest. So whilst it may be easier on a month to month basis to keep up with the payments, you do end up spending more than if you had opted for a standard home loan.
For example, assume you wish to compare a standard home loan to an extended period home loan for a value of R500 000 rand, at an interest rate of 7%. The standard home loan will work out to 240 repayments of R3876.49, the extended term (30 year) loan will equate to 360 repayments of R3326.51. It seems so far as if the extended loan is a better option, you are paying R549.98 less per month than on the standard home loan. If however, we now work backwards to see how much you would pay in total, the standard home loan adds up to R930 357.60 whilst the extended period loan causes you to pay R119 7543.60, that is an extra R267 186! Not quite so cheap after all, is it.
Although an extended period loan does cost less on a month to month basis, it ends up costing an arm and a leg in interest. Of course the ideal would be not to have to take out a home loan at all, but there are not many people who have the ready cash to buy a house without financing of some description. So you need to consider your situation carefully before making a decision. If you are considering an extended period loan, think about what you could do with that added cost!
Which option is better for you? It depends entirely on your situation. A person with financial independence and stability will be able to afford a standard home loan muc! h more e asily than a person who works on commission or on a contract basis. It also depends on the cost of the house. If you have found your perfect home and it is out of reach because if a few hundred rand a month, perhaps an extended bond is a consideration for you, you may be paying more, but at least you will not have to settle for second best. The standard home loan is also a shorter commitment than the extended home loan. Whilst you will be paying more each month, it will not be long before that money is freed up for other uses, paying for your children's' schooling perhaps or a new car or any number of other things. Take everything into consideration when applying for a home loan; you could save yourself a lot of money if you negotiate it correctly
About the AuthorFor more standard home loan tips, as well as more information on bancassurance, visit our insurance website.
Kenn Renner at KPLE
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