Many prospective applicants are initially confused by what the banks call the “term of the loan”. This refers to the time period over which the loan is paid. Where the confusion comes in is that banks generally offer 20 or 30 year terms and many of our clients think they will be stuck in debt for a good portion of their lives and opt for the shorter term.
This is a mistake, however, as the term of the loan (that 20 or 30 year period) is the MAXIMUM time you have to repay your loan and is not a compulsory time period you must commit to.
We advise all our clients to go for the maximum term available because, generally speaking, the monthly repayments on a 30 year loan are lower than those on a 20 year loan. This means that:
1) The client is more likely to qualify for the loan:
An increase of 10 years (from a 20 to a 30 year term) means that your loan repayment is spread out over an additional 120 months and this significantly reduces the amount you will have to pay. And because banks set monthly home loan repayments to a maximum of 30% of the applicants’ gross monthly income a smaller repayment means you qualify for a larger loan amount.
2) The client has some breathing space:
Where possible we recommend that our clients take the 30 year term with the lower monthly repayment but pay at the 20 year level. This will allow them pay the loan off faster but also gives them the flexibility of going back to the 30 year repayment level when they are saving over the short term or encounter financial difficulties
Very few bonds are actually held for the full term of the loan: a great many people sell their property within 7 years and get a new bond or use the profits from their sale to repay the loan.
While we advise clients to take the 30 year term where possible we also encourage them to make every effort to repay their loan as soon as possible (and more here). It is completely within the client’s rights to repay the loan sooner if you have the funds to do so and this early repayment even by a few months can result in dramatic savings on interest.
If you’re worried about any aspect of the approval conditions just ask us and we’ll take you through every step. De Mink Property Finance is here to make your home loan purchase an exciting and pleasant experience!