It is possible to request and extended period home loan, which mean that your monthly repayments are lower, but take place over a longer period of time. This lower payment is due to the fact that the amount owed is spread out over a longer time span. Sounds good does it not? But is it really all that economical?

True, you do pay less each month than on a standard home loan (20 year loan), but you are also making less of a dent in the balance than on a standard home loan. This means that you end up paying more interest. So whilst it may be easier on a month to month basis to keep up with the payments, you do end up spending more than if you had opted for a standard home loan.

Let us take the example of a 30 year home loan and a 20 year home loan, each for R600 000 and being charged interested at 8%. On the standard home loan you will be making 240 repayments of R5018.64, which is a total of R120 4473.60 over the twenty years. The extended, 30 year home loan will let you pay 4402.58 per month, but will amount to a total of R158 4928.80. This means that in total, the extended loan will cost you R380 455.20 more than the standard home loan. So whilst the extended loan offers lower payments; it does in fact cost more once you have finished the repayments. Maybe an extended loan is not such a good idea after all!

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.

For more standard home loan tips, as well as more information on bancassurance, visit our insurance website.