Lake Properties
- Monthly payment: longer term → lower monthly repayment because the same principal is spread over more months.
- Total interest paid: longer term → much more interest paid over the life of the loan, because interest accrues for more months.
- Equity build: shorter term → faster principal repayment, so you build equity faster with a 20-year bond.
- Payment composition: with longer terms early payments are mostly interest; with shorter terms a larger share goes to principal earlier.
Concrete example (so the trade-off is obvious)
Example assumptions (illustrative only):
Loan amount = R1,000,000 (one million rand)
Interest rate (scenario A) = 10.00% p.a. (repayment loan)
Compare: 20-year (240 months) vs 30-year (360 months) at the same interest rate.
Using the standard mortgage formula (monthly rate = annual ÷ 12; monthly payment M = P·[r(1+r)^n]/[(1+r)^n−1]):
At 10.00% p.a.
- 20-year (240 months):
- Monthly payment ≈ R9,650.22
- Total interest over life ≈ R1,316,051.95
- Total paid (principal + interest) ≈ R2,316,051.95
- 30-year (360 months):
- Monthly payment ≈ R8,775.72
- Total interest over life ≈ R2,159,257.65
- Total paid ≈ R3,159,257.65
So: choosing 30 years saves you ≈ R874.50 per month but costs you about R843,205.70 extra in interest over the life of the loan (with the same interest rate).
If the 30-year loan also carries a slightly higher rate (common in the market), e.g. 30-year at 10.5% vs 20-year at 10%, the monthly gap shrinks and the extra interest rises even more:
- 30-year at 10.5% → monthly ≈ R9,147.39 (so only ~R502.82 per month cheaper than the 20-yr at 10%), and total interest ≈ R2,293,061.46 (roughly R977,009.51 more than the 20-yr at 10%).
How equity and early repayments compare (same 10% example)
- After 1 year of payments:
- 20-year: you’ve paid down principal ≈ R16,547.38.
- 30-year: you’ve paid down principal ≈ R5,558.79.
So the 20-year builds ~3× more equity in year one.
- After 5 years: principal paid ≈ R101,975.57 (20-yr) vs R34,256.80 (30-yr).
This shows how much slower principal reduction is on a 30-year bond — early years are dominated by interest.
When a 30-year bond makes sense
- Tight monthly cash flow / uncertain income. If your budget is tight or your income can drop (commission work, contract work, business risk), a lower monthly payment reduces default risk and stress.
- You’ll use the freed cash for higher-return opportunities. If you reliably invest the monthly saving and your after-tax return is higher than the mortgage interest you’re avoiding, the longer term can make sense (but this is an active investing decision and not guaranteed).
- You need flexibility early on — e.g., young buyers who expect income to grow, parents paying school fees, or someone building a business.
- You want the option to pay extra but not be forced to. A 30-yr loan lets you make small payments when cash is tight and bigger ones when you can — many people like that optionality.
- Short holding horizon for the property. If you plan to sell within a few years, the total-interest penalty of 30 years matters less because you won’t be on the full-term schedule.
- Keeping emergency cash. If choosing 20 years would drain reserves or leave you without an emergency fund, pick 30 years and keep liquidity.
When a 20-year bond is usually better
- You can comfortably meet the higher monthly payments.
- Your priority is paying less interest and owning the home sooner.
- You value building equity fast (helps with future refinancing or borrowing against the property).
- You don’t have higher-return uses for the extra monthly cash — the math often favors faster repayment.
Ways to get the best of both worlds
- Take a 30-year repayment bond but make extra payments whenever possible. That way you keep low required payments but reduce the term when cash allows. (Check with your bank about prepayment rules/penalties.)
- Use an offset account (if offered) or a separate savings account: keep cash close to the bond and lower interest effectively by offsetting balances.
- Make “bonus” or yearly lump payments from raises/bonuses — many people treat their raises as a source for extra bond payments rather than more lifestyle inflation.
- If you’re disciplined, invest the monthly saving (the R874.50 in the example) into a low-cost, diversified portfolio — but only if you’re confident about returns and risk tolerances. Compare expected after-tax returns vs mortgage rate.
- Refinance later: start with a 30-year now for flexibility; if income and rates change, refinance into a shorter term later.
Risks & practical checks
- Interest rate differences matter. Lenders often charge a slightly higher rate for longer terms — this reduces the monthly advantage and increases life-time interest.
- Prepayment penalties / administration fees — check your bank’s rules before committing.
- Behavioral risk: having a lower compulsory payment can tempt some people to spend the difference rather than save or invest it. If you’re not disciplined, a 20-year can be safer for the “forced savings” effect.
- Inflation & income growth: if you expect inflation and rising income over decades, the real burden of a long loan falls, which can favor 30 years. But that’s contingent on future events.
Quick decision checklist
Ask yourself (honest answers):
- Do I need the lower monthly payment now to avoid financial stress? (Yes → 30-yr looks better.)
- Can I absorb the higher monthly payment without risking my emergency fund? (Yes → 20-yr looks better.)
- Do I have higher-return uses for the monthly saving and the discipline to invest them? (Yes → 30-yr can make sense.)
- Will I likely sell the property soon? (Soon → 30-yr’s extra interest matters less.)
- Does the lender charge a higher rate for 30 years or prepayment penalties? (If yes, factor that in.)
Lake Properties Pro-Tip: If you’re unsure, pick flexibility: take the 30-year bond only if your bank allows penalty-free extra repayments (or has an offset), and then treat the mortgage like a 20-year by paying the equivalent 20-year monthly amount whenever you can. That gives you the safety of a low required payment and the option to own your home faster — without burning your emergency fund.
If you know of anyone who is thinking of selling or buying property,please call me
Lake Properties
083 624 7129
www.lakeproperties.co.za
info@lakeproperties.co.za
