The convenience of paying a lower monthly payment represents a very significant increase in the total purchase expense.
One of the most important decisions when purchasing a home is the number of years you will be paying the mortgage. In general, the more monthly payments, the higher the final cost of the purchase will be.
In a simulation at a fixed interest rate, there would be no doubt. Let’s assume that the home we want to buy costs 350,000 euros. We would necessarily need to contribute an entry of 70,000, and add the purchase management costs to the remaining 280,000, which would be around 10%. If our debt with the bank is paid off within a period of 30 years, at a fixed interest rate of 2%, the installments would be around 1,165 euros, and the final cost of the home would have been approximately 420,000 euros.
However, if we pay it in ten fewer years, exactly 20, in addition to carrying the weight of the mortgage until a not so advanced age, we would be paying 40,000 euros less at the end of the process. Of course, we should be able to assume a bill of 1,595 euros per month. And we can go further: if we reduced the number of years to 15, the savings would be 60,000 euros in interest to the bank.
In which cases are longer terms of interest?
A foreseeable drop in interest rates could make it an interesting option to pay a little less during the first years, and amortize large amounts with the savings from that more comfortable bill. In this second option, two important negotiations would come into play with the entity that lends you the money: the land in a variable interest mortgage and the amortization price.
We come from atypical years, in which low interest rates encouraged spending and discouraged savings, and we have even seen the Euribor negative for several months. Hence, many entities chose to put a lower cap on the cost of this type of loan. In a variable mortgage, the agreement currently is usually “Euribor + X%”. If that floor is low, the possibility of lowering the price of the letter in the coming years is high. Few banks want to place it below 0.6%, although their strategy is evolving with greater or lesser certainty.
Negotiate the cost of amortization
The other big deal, the amortization price, can also bring significant savings to long-term mortgages. Those who, with the current rates, above 3.5%, choose to give themselves longer payment terms, are in need of using savings to amortize relevant amounts of the debt, or wait for the foreseeable rate drop in 2025 and 2026 to renegotiate interest and length.
The commission for providing savings to reduce the cost of the mortgage, or to cancel it, was eliminated in 2023 with the intention of alleviating the complicated increases in apartment bills. The agreement has been extended until the end of 2024, and even if it is extended a little longer, it will no longer be free as soon as the Euribor moderates, so it is advisable to negotiate that percentage with the bank at the time of signing.
The amortization cost cap is 2% for the first ten years, and 1.5% thereafter. This is a very high amount, which in times of very low interest rates turns this option into an expense, and not an opportunity. Ideally, this percentage should be as close to zero as possible.
Therefore, when we seek financing for the purchase of a house, we should not only look at the percentage that is sold to us in large quantities. We have to go much deeper: check that to reach a good agreement we do not have to pay home insurance five times more expensive than usual, hire an alarm that we do not need, move a payroll that another bank is offering us greater profitability… As we say, we must also evaluate which bank offers a lower floor at variable interest, and which provides a cheaper mortgage repayment.
Along with this, we should do an in-depth review of our economic situation and check what number of years we can go into debt as a minimum to lead a peaceful life without financial burden, but also without unnecessary interest expenses.
