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Is it better to borrow over 20 or 25 years? To buy their main residence, many households ask themselves the question. The pros and cons of choosing the right financing term.
Why do some borrowers prefer a 20-year term for their mortgage, and others opt for 25-year financing? Real estate interest rate , monthly payment, total cost of credit, debt ratio… many variables can lead to prefer one or the other of these mortgage durations. Discover the strengths and weaknesses associated with reducing or extending the repayment period of a loan.
Interest rate and cost of credit: advantage of a 20-year credit
According to the Observatoire de Crédit Logement, the average duration of real estate loans was 20 years in May 2022. This duration increases, however, if we only take into account purchases of main residences, and if we exclude rental investments and loan buybacks. In this case, 65.3% of loans are granted over a period of 20 to 25 years, a figure that is up sharply compared to 2021, when this proportion was only 56.1%. In question ? An increase in interest rates which eats into households’ debt capacity, and a high level of inflation which further reduces their purchasing power.
By lending money to their customers over 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 of a mortgage taken out over 20 years is 1.55%, against 1.70% over 25 years. The interest to be repaid is therefore less important, especially since the borrower pays it over a reduced period. The total cost of credit is therefore reduced, with an overall amount of interest to be paid lower over a period of 20 years than over 25 years.
Monthly loan payment and debt ratio: a more favorable 25-year term
By repaying their mortgage faster, individuals who opt for a 20-year term must face a higher monthly payment. It is therefore necessary to be able to take out several tens, even hundreds, of additional euros each month. Thus, a mortgage of 200,000 euros taken out over 20 years at the rate of 1.55% results in a monthly payment of 969.70 euros, against 818.80 euros for the same sum borrowed over 25 years at 1.70%. Total: more than 150 additional euros to be taken out each month by borrowing over 20 years rather than 25.
Beyond the monthly budget aspect, you must above all be in the nails at the level of the debt ratio. Since the recommendations of the High Council for Financial Stability (HCSF) have become standards, the rule is not to exceed 35% of the rate of effort, except in exceptional cases. Taking the previous example, this means that a household must have net resources before tax of 3,394 euros per month by borrowing over 20 years, against 2,865 euros over 25 years.
A constrained decision more than a choice
For many borrowers, the choice of the duration of their mortgage is not really one. This is reported by Sandrine Allonier, spokesperson at Vousfinancer: “Often, the extension of the credit period is not done by choice but by obligation”. Indeed, in order not to exceed the debt ratio of 35%, many households are forced to opt for the longest term. They can thus claim the same amount of financing as over a shorter period, at a higher total cost of credit. And for those who do not want to resort to this option, other solutions exist to borrow over a shorter repayment period: bring more personal money into their real estate project or cut corners on their purchase criteria to find a house. or a cheaper apartment.
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