A mortgage loan is one of the most frequently used options in resolving its own housing in the case that the housing applicant does not have enough of his own funds. It goes without saying that everyone wants to pay as little as possible on this loan. The less he pays, the more he stays in his wallet. There are many possibilities for how to achieve this.
In this article, I will deal with the difference between twenty and thirty-year maturity of a loan with the possibility of early repayment. What’s more worthwhile? Shorter maturities with lower repayments or reduced repayments and investing funds for longer maturities?
Mortgage loan maturity selection
Maturity years have a significant impact on total reimbursement and are among the most important issues in credit processing. The shorter you pay off the loan, the less you pay on interest. Everyone wants it. At the same time, however, with a shorter maturity of a mortgage loan, its payment is higher.
Below in the table you can see that the decision for shorter loan maturity will give you € 6 694.80 more on account after 20 years due to lower overpayment. Of course, only if you do not miss them. But you can also see that this decision will mean a higher installment of up to € 110.96 for 20 years. Which of the two options to choose?
A mortgage is a long-distance run and we certainly agree that not one of us wants to run until retirement. Indeed, indebtedness for 30 years does not sound very appealing. That’s why many people choose shorter maturities. The maturity of a mortgage loan should first and foremost be adjusted to the maximum acceptable amount of the monthly installment with respect to the income and expenses of the housing applicant.
Therefore, we need not just follow the current situation and watch the future. For the entire repayment period, there may be situations where lower installment can benefit the family budget. For example, it may be a loss of job, a family gain, and many other situations that we are not always able to cover with life insurance.
However, while a similar situation does not occur, it is advisable to delay the difference between a larger and a smaller installment. You can later use your money for extra deposits that will reduce your repayment or reduce maturity. If such a situation does not occur at all, or if you do not have to use the funds, you can repay the entire loan prematurely by several years.
Early repayment of a mortgage loan
You do not have to worry about a longer maturity. If you use the lower installment just to create a reserve, you can repay the mortgage loan a few years earlier. The big advantage is that you also save money and create the reserve in addition to repaying your mortgage. This can be used to reduce earnings, increase living costs or raise interest rates. However, it is best to use savings to repay the entire loan early.
Below is an example of early repayment of a 30-year mortgage loan.
- Mortgage amount € 80,000
- Interest Rate 1.49%
- Monthly installment € 275.71
- Interest paid € 19255.60
- Total paid 99255,60 €
If the buyer wants to repay his mortgage already at the end of the 20th year, it would be enough to postpone 74.43 € / month. This is even less than the difference between repayment at 20 and 30 years maturity. This is up to € 110.96. But to remember the important fact, the money must earn 5% per year. Do you ask where can an appreciation be achieved? We will also get to it.
As you can see in the picture below, by repaying the loan in the year 20, almost € 2364.26 will be saved on interest. However, the installment difference is € 110.96 and not just € 74.43, which is enough for early repayment in the 20th year. This means for us to further € 36.53 / month for 20 years, and thus € 8767.20. Together, the savings on early repayment are € 11,131.44.
Investing the entire difference between the two installments
The difference of € 4436.64 in favor of longer maturities in combination with investment funds and early repayment is clear. It can be even bigger if you decide to invest the entire difference in the installment. You pay essentially the same amount for a shorter maturity, but part of the money is saved and part goes to the loan repayment.
The upturned amount in the 20th year is up to € 45,798.33, the balance of the debt is € 30,720.94, which means you will pay off your mortgage and you will have decent extra money.
Of course, if a client decides after 20 years that his income is sufficient and he can continue to repay the mortgage without any problems, he can continue and let the money saved work. The result may be that the mortgage will be paid back in the 30th year, but may have a decent retirement package in the total amount of € 62,203.58 when investing € 74.43 / month and € 110.96 / month even when invested € 92,732.20.
Although this seems incredible, it’s just a simple math. However, the current and future value of money must always be considered.