Thanks to historically low interest rates in mortgage lending, many buyers are tempted to take advantage of this opportunity to start buying their main home. But faced with high prices – especially in large cities, sometimes the question of real estate credit over 30 years. Which borrowers commit to this duration and is it desirable to consider these durations of 30 or even 35 years?
Borrow over 30 or 35 years: several criteria to take into account
We hear a lot about loan durations that are getting longer, and that we can, today, borrow for 35 years. It is still necessary to weigh the pros and cons of a commitment over such a period. In which case to bet on an extension of its duration of loan or on a duration of mortgage loan shorter?
The central element remains the borrowing capacity. But the choice to contract a mortgage on 30 or 35 years is made according to several criteria. In terms of borrowing capacity, the purchaser adapts the real estate credit charge to his income. This drives him to adjust the duration of his mortgage in order to maintain an acceptable debt ratio. Then, the property to acquire is important: do we want or can we keep this property over the long term, or do we consider this acquisition as a real estate stage?
Answering these questions makes it possible to better identify one’s possibilities and to know if a 30-year mortgage is adapted to his situation. For example, by respecting the debt ratio and considering that there is no other credit in progress, a household that incurs a mortgage of 150,000 euros over 20 years must receive income of 2,150 euros. But with a real estate credit spread over 30 years, 1,750 euros of income is enough; which allows more modest households to realize their dreams. On this simulation, with a mortgage over 20 years at the average mortgage rate excluding insurance of 1.30%, the monthly payments excluding insurance amount to 710 euros while monthly payments over 30 years are, they, 577 euros… But the average real estate rate excluding insurance climbs to 2.30%.
Lengthening the duration of your loan: a financial impact
The mortgage interest rate increases as the term of financing increases. The reason for these higher real estate rates on longer terms is the risk premium. Indeed, the longer the mortgage, the greater the risk of default by the borrower. Preserving their margins encourages banks to actually increase the cost of the loan.
Let’s take our example of financing up to 150,000 euros. Over 20 years, the average real estate rate is 1.30%, with a cost of real estate credit of 20,425 euros. But over 25 years, the average non-insurance property rate is 1.60%. In this case, the cost of credit will be 32,093 euros. A cost that increases by 57% between a mortgage on 20 or 25 years.
So must we borrow over 30 years?
Over 30 years, it is possible for future buyers to consult not only traditional banks, but also to claim more confidential offers by entrusting their search for financing to a real estate broker. The condition: show white paw. Thus, with traditional banks, a file over 30 years is accepted provided that it is also financable over 25 years. No financing over 35 years possible nevertheless. Banks willing to use a fixed term for a loan that does not pass on a shorter duration are rare, for a question of risk: indeed the slightest budgetary tension would become problematic for the borrower.
As for specific offers financing households over 30 and 35 years, it will not be necessary to be financeable over 25 years this time: they are made possible by the provision of guarantees, but the criteria are strict and the rest to live remains a central element of the analysis of these mortgage loan files.