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A 30-year bond is a bad idea

By unknown | May 12, 2008 | COMMENTS [ 0 ]

Xolile Bhengu

Xolile Bhengu

A bond extension looks attractive when rising prices make the monthly repayment hard to meet, but financial advisers have warned homeowners to use the provision only as a last resort - and a short-term one at that.

Banks offer homeowners the option to extend their bonds from the traditional 20-year repayment period to as much as 30 years.

A 20-year mortgage term with a loan of R500000 using the current 15percent prime rate, means monthly instalments of R6584, and a total of R1080147 at the end of the term.

This means apart from the initial capital repayment of R500000, a homeowner will have paid R580147 just in interest.

Extending that bond to 30 years, also at 15percent interest, will cut the monthly instalment by R262 to R6322 monthly, but push the total repayment to R1,7million. The interest repayment would be more than double the original value of the loan.

Banks said they were constantly looking at options to help struggling consumers because they were in the business of financing and not selling houses.

Standard Bank economist Sizwe Nxedlana said consumers needed to view the switching of bond terms only as a short-term measure.

"Consumers who are considering selling their house now, must consider the current unfavourable market conditions, and keep in mind that they would get less for their home," he said.


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