Time to switch to 30-year loans?

Cash-strapped homeowners should consider extending their mortgage repayment period from the conventional 20 to 30 years, a move that could translate into a R620/month saving on an R1m loan.

Banks and mortgage originators have in recent weeks started to encourage homeowners to take this route before they start falling into arrears and potentially lose their homes.

“Extending the repayment period on a home loan is probably the quickest and easiest way to bring immediate relief to financially stressed homeowners,’ says Mary-Jane Lefevre, call centre sales manager for mortgage originator ooba (ex MortgageSA).

New entrants to the housing market will also qualify for a bigger loan if they opt for a 30-year repayment term from the outset. Lefevre notes that extending the repayment period does have a cost implication because homeowners are adding another 10 years of interest repayments onto the loan. However, Lefevre says it is seldom that homeowners would retain a mortgage for as long as 30 years. She notes that the average life span of a home loan in SA is seven years.

The size of the potential monthly saving on a 30-year repayment term depends on the loan amount and discount to the prime interest rate that a homeowner would qualify for. For instance, the repayment on a R1m mortgage over 20 years at 13,5% (1,5% below prime) amounts to R12 070/month. If the term on the same loan is extended to 30 years the repayment drops to R11 450/month.

Lefevre maintains that banks have become increasingly flexible in renegotiating mortgage repayment terms, as most want to avoid as far as possible being forced to go the repossession route.

Ronell Killian, head of bond origination at developer Amdec, says in recent months the group has seen a significant rise in applications for 30-year repayment periods among new homebuyers who want to soften the blow of higher interest rates.

Says Killian: “Even though most mortgage applicants intend paying the instalments which would apply to a 20-year repayment term, many apply for a 30-year period as a buffer to ensure bond repayments remain affordable should rates increase further“.

Absa Home Loans managing executive Gavin Opperman confirms that the bank is keen to discuss an extension of the repayment term to help financially stressed homeowners to weather the higher interest rate cycle.

Opperman says there is no doubt that SA consumers are battling to meet increased debt servicing costs. Absa, SA’s biggest mortgage lender with a home loan book worth R204bn, has seen a 35% rise in delinquencies (arrears) over the past year. “But we are doing our best to keep our clients in their homes,’ says Opperman.- Joan Muller

This article was published on Property24