Home Loans: Standard Or Extended?

Home Loans: Standard Or Extended?

Home Loans: Standard Or Extended?

It used to be popular to get an extended period home loan, where you were able to pay a lesser amount each month for a longer period. This is because the amount that needs to be paid back is spread out over a longer period of time. Now is it really a good way to save money when compared to a standard home loan?

It is true that you pay lower monthly installments when you opt for an extended period home loan, but you will end up paying interest on a higher balance than someone who has a standard home loan (20 year home loan). So, whilst you may feel the pinch of buying a house less with an extended period home loan, you do end up paying more than with a standard home loan.

For example, assume you wish to compare a standard home loan to an extended period home loan for a value of R500 000 rand, at an interest rate of 7%. The standard home loan will work out to 240 repayments of R3876.49, the extended term (30 year) loan will equate to 360 repayments of R3326.51. It seems so far as if the extended loan is a better option, you are paying R549.98 less per month than on the standard home loan. If however, we now work backwards to see how much you would pay in total, the standard home loan adds up to R930 357.60 whilst the extended period loan causes you to pay R119 7543.60, that is an extra R267 186! Not quite so cheap after all, is it.

So, whilst an extended period home loan may help you keep body and soul together whilst you are paying off your home, it costs a good deal more than the standard home loan in the long run. This means that if you were to lose your job, the lower payment may help in preventing you form being blacklisted due to being unable to make your monthly payments, but is it really worth the added expense? There are a lot of things you could do with the R267 186 you save by taking the standard home loan option.

So which option is the better option? That depends on your financial situation and how much you are able to pay each month. If the house of your dreams is just out of reach on the standard home loan, perhaps extending it by a few years will make it affordable. It will have cost quite a bit more when you have finished paying it off, but at least you did not have to settle for second best. I would say that if you have a stable financial situation and can afford the monthly repayments, the best idea is to go for the standard home loan. You may pay more each month, but you will be paying that amount for a much shorter period and will save a lot of money on interest. A longer term may be better if the job market is unstable or if you do not earn enough to afford a house on a standard loan option.

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