Mortgage Credit: Should You Borrow Over 20 or 25 Years?

Mortgage Credit: Should You Borrow Over 20 or 25 Years?

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Is it better to borrow for more than 20 or 25 years? To buy their main residence, many families ask themselves the question. Pros and cons of choosing the right financing term.

by MoneyVox,

Why do some borrowers prefer a 20-year term for their mortgage, and others choose 25-year financing? Mortgage interest rate, monthly payment, total cost of credit, debt ratio… Many variables can lead to a preference for one or the other of these mortgage terms. Find out the strengths and weaknesses associated with reducing or extending the loan repayment period.

Interest rate and cost of credit: The advantage of getting credit for 20 years

According to Observatoire de Crédit Logement, the average term of real estate loans was 20 years in May 2022. However, this term increases if we take into account only the purchase of prime housing, and if we exclude rental investments and repurchases of loans. In this case, 65.3% of loans are granted over a period of 20-25 years, a number that increases sharply compared to 2021, when this percentage was only 56.1%. because of ? Increased interest rates that undermine households’ ability to debt, and a high level of inflation that reduces their purchasing power.

By lending money to their customers within a short period of time, banks offer more attractive interest rates. According to data published by Empruntis at the beginning of June, the average interest rate on a mortgage obtained over 20 years was 1.55%, compared to 1.70% over 25 years. Thus the interest to be paid is less important, especially since the borrower pays it over a reduced period of time. Thus, the total cost of credit is reduced, with a lower total amount of interest being paid over a period of 20 years compared to over 25 years.

Read also: Mortgage credit: review of the method of calculating the rate of erosion, an emergency?

Monthly loan payments and debt ratio: 25-year term is more favorable

By paying off their mortgage faster, individuals who choose the 20-year term should experience a higher monthly payment. It is therefore essential to be able to collect several tens, even hundreds, of extra euros each month. Thus, a mortgage of €200,000 acquired over 20 years at a rate of 1.55% results in a monthly payment of €969.70, compared to €818.80 for the same amount borrowed over 25 years at a rate of 1.70%. Total: More than 150 extra Euros borrowed per month by borrowing over 20 years instead of 25 years.

Aside from the monthly budget aspect, you should above all be on guard at the debt ratio level. As the recommendations of the High Council for Financial Stability (HCSF) become standards, the rule should not exceed 35% of the effort rate, except in exceptional cases. If we take the previous example, it means that the household should have a net pre-tax resource of 3,394 euros per month by borrowing over 20 years, compared to 2,865 euros over 25 years.

A decision restricts more than a choice

For many borrowers, choosing a mortgage term is not really one choice. “Often, the extension of credit is not done by choice but by commitment,” said Sandrine Allnier, a spokeswoman for Vousfinancer. In fact, in order not to exceed the 35% debt ratio, many families are forced to choose the longer term. Thus they can claim the same amount of financing over a shorter period, at a higher total cost of credit. And for those who do not wish to resort to this option, there are other solutions to borrow over a shorter repayment period: bring more personal funds into their real estate project or reduce their purchase criteria to find a cheaper home or apartment.

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