Mortgage and the length of the repayment period
What is the right length of the mortgage repayment?
Most clients choose the maximum possible mortgage maturity, which is 30 years in most cases. Why is it so if, with regard to their salary, most of these clients could choose a shorter repayment period, that is, higher monthly payments? This way, they would have overpaid less and had their mortgage loan repaid sooner.
I would say that the 30-year mortgage maturity period is common, and the majority of people who could choose 30 years of repayment due to their age have opted for it. Only a few clients calculated it mathematically, or there is another logical reason for it. Two factors play an important role in deciding the mortgage maturity:
- the first one is emotional - a lower payment hurts less,
- the second one comes from reality - “if I took a mortgage loan 15 years ago with a monthly payment of 1,000 crowns while earning 3,000 crowns, and I earn 30,000 crowns today, the mortgage payment would be insignificant in proportion to the salary = it will be like this also today, the monthly payment is 333 EUR, I earn 1,000 EUR, and the more I earn, the more insignificant the monthly payment will be.”
It is hard to tell what the inflation rate will be in 15 to 30 years and the interest rates are also difficult to estimate, so I recommend my clients to adjust the length of the mortgage repayment to such a monthly payment that it does not jeopardize their normal functioning even with a salary without bonuses or overtime, or if the interest rate rises, let’s say, by one half, or if another loan is an option, or... Simply put, it is always better to leave a reserve and to prefer the extra mortgage repayment options.
Kamil Bučo, 06.07.2009
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