Bonds are usually something that a lot of homeowners stress about and with good reason: you are pretty much investing a lifetime into your new property.
A 30-year bond repayment might seem like a long time, and just like everything else, it has its own list of pros and cons! After all, your financial situation will ultimately determine the time period for the bond repayment that you take out.
Before making any hasty decisions, here is a brief list of the pros and cons of a 30-year bond repayment as a potential time period choice for your bond:
PROs of a 30-Year Bond Repayment
A 30-year bond repayment lets you pay back less on your bond per month than you would have with any other bond.
And yes, for a consumer who is feeling the monthly cash flow pinch, this is a great option.
Reduced instalments will give you breathing space from month-to-month and you will be in a position to use your money towards other necessities (let’s hope that reducing your overall debt is your main priority).
Extending your bond to 30 years will also change your affordability profile because the lower your monthly instalments will be, the higher possible bond amount that you can take out.
In other words, you will be able to afford a much more expensive property than you otherwise would have if you opted for a 20-year loan!
A 30-year loan also gives you the freedom to save up as much as you can and use that money to pay off a car or even put more money into your bond to pay it off quicker. You can also use this bond as a flexi-facility so that you almost create an additional savings facility.
Finally, from a tax-perspective, you would be able to claim the interest on your 30-year home loan as a deduction against rental income for 10 years or more, something you cannot do with a 20-year home loan.
CONs of a 30-Year Bond Repayment
The number one disadvantage of the 30-year home loan is that you are going to be paying off this loan for longer and interest rates might increase your repayments. Plus, there’s a chance that your interest rates might increase faster than with a 20-year bond repayment.
Considering your age, if you take out a 30-year home loan in your 30’s, this means that you are still going to be paying your loan off until you are well into your 60’s – something that is not always possible for those who are forced to retire.
This brings us to the next point: carrying that much debt into your retirement age can influence your retirement fund as you might not be able to top it up as much as you want. Your care-free retirement years will be in jeopardy with a home loan still hanging over your head.
A 30-year bond repayment has a higher total interest rate than a 20-year bond. You can expect to pay at least 64% more which might not sound so bad if you pay it off month-by-month.
But in reality, you are going to be paying much more than what the house is worth at the end of the period!
Any bond that you take out can be risky, but with a 30-year bond, you need to be extra cautious even if it looks attractive. It could work in your favor if you are financially savvy and you can manage your savings and day-to-day finances, but it can also lead to a huge amount of debt later in your life.
If you are merely using the lower instalments to fund your lifestyle, then you should seriously reconsider the loan and rethink your options more realistically!
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