Yesterday’s post on understanding the home loan ( read it here) was by far the most popular post I have written. I appreciate all your comments and share because that shows that a lot of us consider the topic relevant. This led to my next question. Are you able to afford the loan that you are taking out or can simply service the debt?
Affordability is define in context of the cost of the item in question in relation to what the purchaser is able to pay. Understand this will shed some light why home loans are generally given over a longer period of time as opposed to other assets.
Let take for example my case: My home loan is N$479 000 at an interest rate of prime plus 1% repayable over a period of 20 years. At those terms, my monthly repayment is at N$ 5 098. I could complain to the bank that I do not want 20 years but the bank would probably not lend me that much money. If I do the math, the same loan of N$479 000 at prime plus 1% over a 5 will give me a monthly repayment of N$10 537. This may somehow still be manageable for an average young professional.
But houses are not that cheap in Namibia and we know it. Take a typical example of a flat in Windhoek. Same terms for a 2 bedroom flat in Windhoek that is costing N$750 000. At the prime plus 1 interest rate over a 20 year period, your monthly repayment stands at N$7 999. Change the variable and put in 5 years instead, you will be required to be paying N$16 494. That is clearly not affordable to many of us.
The thing is, the banks do not force us to take out the loans for 20 years, they do it because they know that at 20 years, we are able to service the debt because the premiums will be lowered due to the number of years that they have to recover their money. However, if they had to borrow over a shorter period of time, they will be taking on an increased risk which increase chances of defaulting customers.
So next time when you look at the property, do not just be blinded by the quest of owning a property, also look deep within you. Are you able to afford that loan or simply able to service the monthly payments? A loan that you are able to afford , you will be able to define your own payment terms and save a whole lot in interest.