DEVELOP & INVEST
Under the plans considered by the British government , the longerterm products would enable people to borrow larger amounts from lenders , and if they were to die during the loan term , the debt could be passed on to their children . How this would work in practice , though , is still unclear .
Longer-term mortgages are already growing in popularity . The Guardian highlighted that Building Societies Association stats show that 37 % of first-time buyers are opting for mortgages of between 30 and 35 years in the UK .
A good idea ?
So , is a mortgage term that ’ s longer than 25 / 30 years ever a good idea ? Grant Smee , managing director for Only Realty and CEO of Frankie Bells , says : ‘ Depending on your current situation , it may not be a bad idea to opt for a longer bond period if it ’ s made available to you . When one factors in the cost of living , rising inflation , and the price of levies and municipal rates , a higher bond term could offer some breathing room and flexibility .
They ’ ve also soared in popularity as those in full-time pay see their salaries not keeping up with inflation . The advantage of extending the term on such loans is the ability to keep repayments low – something that ’ s still possible in a low interest rate environment .
It may also make it far cheaper to buy as opposed to renting , but this would depend on the market concerned .
‘ In a case like this , however , I would strongly advise that you continue to save the additional money that you would have put into your bond each month and reinvest it to make a return . Remember : a longer mortgage term means that you will incur more interest over time . As your income grows , it ’ s also advised that you pay down the bond period by putting in extra money each month .’
Passing on debt to children
If a longer-term mortgage was made available , the same scenario could play out as it has in Japan where debt is passed on to children . But would this work ? A property could , after all , still be an ‘ inheritance ’ even if there is debt tied to it .
But experts highlight that this problem could be mitigated by taking out appropriate life cover . ‘ The customer may opt for credit life insurance , which covers the outstanding balance on the home loan in the event of death , disability , loss of income and retrenchment . Or they could choose general life cover , which can be used to settle the home loan debt in the event of the customer passing on ,’ points out Mfundo Mabaso , growth head of FNB Home Finance .
The bigger question is : will we ever see such a product introduced in South Africa ? According to FNB , one of the biggest lenders in the country , it ’ s unlikely . Currently , FNB offers home loans with terms of up to 30 years .
Mabaso says : ‘ We offer terms up to 30 years – with a strong drive for customers to pay in more than their minimum repayment , affordability permitting .’
He adds : ‘ It is unlikely that we would offer a term beyond 30 years given the prevailing interest rates . The intent of providing mortgage lending is to help customers build wealth , and at a term longer than 30 years the opposite may be true .’
35 F I N A N C I A L F O C U S