Mortgage loan term: what cost for your credit?

Home loans tend to get longer

Home loans tend to get longer

Today, the duration of a home loan tends to lengthen in order to increase its borrowing capacity and thus offset the rise in housing prices. However, not so long ago, the duration of real estate financing never exceeded 20 years, the average of the loans being even less than 15 years ago.

2 reasons for this:

  1. A more accessible real estate market than today
  2. Borrowers who more often had a personal contribution and who first went through the “savings box” before embarking on the acquisition of their main residence.

After a decade of consecutive increases that saw house prices double between 1998 and 2008, things have changed and the French have started to do what the Anglo-Saxons have been doing for a long time: borrow for the long term and choose the duration of their mortgage over 30 years and more. 

Duration impacts the rate

Duration impacts the rate

The choice of the duration of the mortgage obviously has a direct impact on the interest rate and the cost of your credit. The longer it is, the higher the rates, the banks thus passing on the increased risk which is greater on long-term loans.

Example of rate for a mortgage taken out over periods ranging from 7 to 30 years on the basis of borrowed capital of $ 150,000 (1)
DURATION RATE MONTHLY (2) COST OF CREDIT
7 years 0.50% $ 1,817 $ 2,671
10 years 0.80% $ 1,301 $ 6,129
15 years 1.05% $ 901 $ 12,187
20 years 1.30% $ 710 $ 20,424
25 years 1.50% $ 599 $ 29,971

(1): based on the best fixed rates observed in July 2017. (2): results excluding insurance. As we can see in this example, increasing the duration of five years from 10 years to 15 years will lower the monthly payment by 400 $, while this decrease is less significant from 20 to 25 years (minus 111 $) .
On the other hand, the increase in the cost of credit will be more significantly greater from 25 to 30 years than from 10 to 15 years. 

Is there an ideal duration?

Is there an ideal duration?

The choice obviously depends on everyone’s financial situation. There is no ideal duration. You just have to keep control of the budget and especially choose according to its repayment capacity.

The first step is therefore to assess your financial situation and calculate your maximum debt ratio. Depending on the results it will be possible to know how much one can borrow.

Monitor the debt ratio

The ideal is not to exceed a debt ratio of 33%, which generally requires the banks, but it will depend, again on your personal situation and especially on your remainder to live, that is to say -to say what you will have once the credit is repaid.

The bank can very well authorize you to exceed this rate if your “remainder to live” remains largely sufficient to manage your budget normally and to mitigate possible hardships.

You also have to plan for the future, which many borrowers fail to do. Everyone’s situation is bound to change. If you have to change cars later, for example, you will either need to have some capital on hand or be able to call up consumer credit. For this, your debt ratio will have to allow it.

Modulation

Today most banks allow you to adjust the maturities. The borrower can thus, under certain conditions modify the monthly payment upwards or downwards, which will have the consequence of modifying the duration of the credit.

The conditions of a flexible loan, however, vary widely from one organization to another and it is preferable to inquire beforehand about the costs that this mechanism entails. Negotiating your mortgage over a long period is not always easy. With the financial crisis, credit institutions have hardened their position considerably.

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