Beware of longer term home loans

With Namibia’s housing market compared to the likes of Hong Kong, Dubai and Brazil in terms of fast-growing prices, owning their own home is a dream still eluding many citizens. As a result of Namibia’s challenging market, a number of alternatives to the standard home loan have emerged, which, according to FNB Namibia Head of Home Loans Thomas Slabbert, may not be as good as they appear. One such alternative is the “30-year home loan”. “This alternative is marketed as an added benefit and is sold on the premise that it’s a good thing,” Slabbert says. The immediate benefit to a 30-year loan over the traditional 20-year period is the fact that it makes the loan immediately more affordable, given lower monthly instalments. What lenders in these cases often forget, he says, is the obvious impact of them paying more interest over a longer period. The total amount paid on a bond of N$1 million for example, over 20 years, would be around N$2.4 million, versus N$3.2 million over 30 years. “Some may correctly argue that we need to do the calculation in real terms, in effect adjusting the amounts paid for inflation over time. Inflation, depending on its level, can sometimes make it attractive to repay debt as slowly as possible,” Slabbert says. He adds that inflation is significantly lower in modern times, and interest rates normally above the consumer price inflation rate – thus making delaying repayment of debt for as long as possible less attractive. “While many of us would be tempted to take the 30-year loan option with its lower monthly repayment value, we may well regret the decision after 20 years when we realise that we haven’t even paid off half the loan amount yet,” Slabbert says. Another consideration, he says, is that real-life interest rates fluctuate, with lower rates leading to lower monthly instalment values on a 30-year loan, when compared to a 20-year loan. “However, this gap will diminish as interest rates rise, and ultimately they normally do, with the instalment on a 30-year loan rising faster in value than the 20-year instalment as interest rates rise.” “All in all, while there is no right or wrong with regard to the choice of the term of a loan, clients should be under no illusion that there are significant longer-term costs and risks involved, in return for a very limited short-term benefit, in the form of a mildly lower instalment repayment value while interest rates remain low,” Slabbert says.