Blogs
What's New Trending
20-year or 30-year bond: how to choose
A longer bond lowers your monthly instalment but costs you more interest in total. A shorter bond costs more each month but saves interest and leaves you debt-free sooner. For most buyers the choice comes down to what instalment fits comfortably today, and how much risk of overstretching you want to avoid.
What changes with the term
The term is the number of years over which you repay the loan. Spreading the same amount over more years makes each instalment smaller, because each one repays a smaller slice of the capital. But the bank charges interest for longer on a balance that falls more slowly.
The effect looks like this:
- Shorter term (20 years): higher instalment, faster reduction of capital, much less interest paid over the life of the loan.
- Longer term (30 years): lower instalment, slower reduction, much more interest paid overall.
The size of the difference depends on your loan amount and your interest rate. Try both terms with your own figures in the bond repayment calculator. Look at the total repaid, not just the monthly figure.
How the term affects what you can borrow
A bank checks whether you can afford the instalment. Because a longer term gives a lower instalment, it can raise the amount you qualify for, or make a loan possible when a shorter term would not be. See how banks decide what you can afford.
That can be useful, but be careful. Qualifying for more does not mean you should borrow more. A bigger loan over a longer period is the most expensive way to buy a home. Ask what term each bank offers, because the maximum differs.
A flexible approach: choose long, pay as if short
Many buyers choose the longer term for safety and then pay as though the term were shorter. You agree to the lower required instalment, which protects you if money gets tight, but you pay extra whenever you can. If you lose income, you fall back on the lower amount. If things go well, you finish the bond early and save interest.
The catch is discipline. An instalment you are not required to pay is easy to skip. A few ways to keep to it:
- Set up a second debit order for the extra amount on payday.
- Decide your target date in advance, and use the extra bond repayment calculator to find what extra amount gets you there.
- Pay any bonus or windfall into the bond.
Check with your bank that extra payments are allowed and how they are applied. Read paying extra into your bond for the questions to ask, and note that some banks offer facilities to take extra money back, explained in access bonds and re-advances.
Which term suits you
A shorter term makes sense when
- You are older and want the bond gone before retirement.
- Your income is high and stable, and the larger instalment leaves a comfortable margin.
- You want the lowest total cost, and have no better use for the money.
- Your interest rate is high, so each year of interest is costly.
A longer term makes sense when
- You are a first-time buyer with a tight budget.
- Your income varies, for example if you earn commission or run a business.
- You want room for other goals, such as an emergency fund, retirement savings or children’s costs.
- You are buying at the top of what you can manage, and want a margin if interest rates rise. Test this in the interest rate change calculator.
Other things to consider
Your age matters, because banks may limit the term so that the loan ends before a certain age. Ask about their rules. Whether your rate is fixed or variable also affects risk. See fixed or variable interest rate.
Keep in mind that a bond term is not a promise to stay for that period. Many people sell or switch banks long before it ends. In that case what matters most is the interest you pay while you hold the bond, and the balance you still owe when you leave. If you do settle early, the National Credit Act allows it, and the lender may charge a capped early termination charge. Notice requirements come from your loan agreement, so read it.
Do not forget that the bond instalment is only part of your monthly cost. Include rates and taxes, levies, insurance and maintenance, as listed in monthly costs of owning a home.
What to do next
Run the same loan through the bond repayment calculator at 20 and 30 years, and write down both instalment and total cost. Then check the longer instalment against your real budget in the affordability calculator. If a 20-year instalment feels comfortable, take it. If not, take 30 and plan extra payments.
This article is general information for South African readers, not legal, financial or tax advice. Rules and rates change, so check your own situation with an attorney, your bank or a tax practitioner. Our property calculators can help you work out the numbers.