The ideal term for your home loan depends very much on your individual situation. Nevertheless, you can use these guidelines to determine perfectly what the most interesting scenario in your situation is financially.
Do you opt for the short or long pain?
The simple fact is that you will have to pay more interest if you spread your home loan over a longer period. To get an overview of the interest that you have to pay for a certain amount over a shorter or longer term, please consult our overview
There is a good chance that you can negotiate an interest of 1.50% over fifteen years for an amount of 200 to 250,000 USD. If you prefer to spread the same loan over twenty-five years, an interest rate of 1.80% is realistic. Of course, the interest that the bank wants to give you will also depend on other factors, such as the size of the amount you bring in yourself.
Borrow longer = longer tax benefit
Do you – like many people – think that it is best to pay off the maximum achievable amount, in order to pay the least interest and to get rid of your loan as quickly as possible?
In practice, this is often not the best solution. For example, if your monthly repayments prevent you from saving, there is a chance that the return on your money will be lower at the end of the ride, even if you manage to pay off your home loan very quickly. Moreover, it is not exactly a pleasant life to make ends meet at the end of the month because your loan weighs so heavily.
If you opt for a more spread payment of your mortgage, you will, among other things, be given space to start saving for your pension, which yields a relatively high interest rate and a nice tax reduction. Another advantage is that you can tax the interest, capital repayments and premiums of your outstanding balance insurance during the term of your loan. For example, the integrated housing bonus guarantees an annual tax benefit of 608 USD.
If your house remains your only home for the first ten years of the term, the tax benefit will rise to 912 USD. If you take out a loan as a couple, that amount doubles. The condition is that the loan in question runs for at least ten years.
It is often not a good idea to pay off your mortgage loan too quickly. But which term is interesting? For many people, a term of 20 to 25 years now seems to be the golden mean. In response to high real estate prices, most banks even make it possible to repay a home loan over a period of thirty or even forty years. Please note: interest can rise quickly for a term of thirty years or more.
For example, it is not inconceivable that for an amount of 200,000 to 250,000 USD you pay almost twice as much interest in thirty years as in twenty-five years. So make sure that you do not stretch the term unnecessarily.
What factors do you have to take into account when determining your ideal term?
Your age (and therefore the distance to your pension) The amount you want / need to borrow The current interest level Your financial breathing space Your tax situation
An ideal maturity period balances all these things neatly. You can go through the different scenarios together with your bank advisor. This way you can clearly determine which formula guarantees you a good quality of life on the one hand and is financially interesting on the other.
Can I shorten or extend the term afterwards?
If you have had a financial windfall, it may make sense to shorten the term and thus save interest. Extending the term can be interesting if you are short on cash at some point and want to increase your financial comfort.
But be careful, because the bank is not obliged to allow a change in the term. Moreover, if you want to extend the credit, the total term of the credit may not exceed the maximum term that the bank allows. If your bank has a maximum of thirty years, a contract with a term of twenty years can therefore be extended by a maximum of ten years. In addition, most banks do not allow you to be more than sixty-five years old on the termination date of the loan.
Also realize that with an extension you will pay higher interest. In addition, the extension will increase the premium of the outstanding balance insurance and allow you to receive additional revisions at a variable interest rate. The extension will give you extra years of tax benefit, which partially compensates for the extra interest.
Instead of renewing your credit, you can also consider refinancing the credit over a longer term. An advantage is that you get the interest for a new application, which is usually lower than the interest with a normal extension of your credit. In that case you will have to pay a reinvestment fee as compensation for the loss of the bank.