Rent or Buy? – Part 4 (Mortgage Length)

mortgageContrary to the title, in this part of the series we’re gonna assume that you decided to buy a property, and won’t compare rent with buy, but compare the effect of the various mortgage length. You might consider a shorter term in order to get rid off your mortgage as soon as possible, or you might want to have the longest term in order to have the smallest monthly payments. Let’s check the numbers which might worth the most!

In this example we’re gonna calculate with a EUR 400k annuity mortgage with 2.5% interest rate. In case of a 30 years length the monthly payment would be EUR 1,580, but if you chose 15 years length, it will go up to EUR 2,667. Bear in mind that in the latter case you will pay significantly less interest during the term of the mortgage (EUR 80,088 vs EUR 168,974).

Let’s also assume that the EUR 2,667 is the amount you’re willing to spend on housing on a monthly basis. Do you find it too high? Well, in my humble opinion then this amount of mortgage is too high for you. You should never max out the mortgage that the bank allows you to get. If the monthly amount of a 30 years mortgage is the maximum you can afford to pay, you will be the slave of your bank and your house for the rest of your life…

Going back to the calculation: in case of you chose the 30 years term, you can save EUR 1,087 per month (2,667-1,580) or EUR 13,044 per year. You can of course spend it on shiny things, but considering you have a 400k mortgage, let’s assume you’re smart and invest it.

We’re talking about 15/30 years here, therefore it would be a wise choice to invest it in the stock market. The historical returns are around 6.8% so we’re gonna calculate with this number.

In terms of the 15 years mortgage, as we max out our monthly housing budget, we can’t save anything during the term of the mortgage payment. Nevertheless after we paid it off, our annual saving will jump to EUR 32,004.

Let’s see it in a table:

Year  30yrs   15yrs 
1          13,040.08                         –
2          26,966.88                         –
3          41,840.71                         –
4          57,725.96                         –
5          74,691.40                         –
6          92,810.50                         –
7        112,161.69                         –
8        132,828.76                         –
9        154,901.20                         –
10        178,474.56                         –
11        203,650.91                         –
12        230,539.25                         –
13        259,255.99                         –
14        289,925.48                         –
15        322,680.49                         –
16        357,662.84          32,005.88
17        395,024.00          66,188.16
18        434,925.71        102,694.84
19        477,540.73        141,683.97
20        523,053.58        183,324.36
21        571,661.30        227,796.30
22        623,574.35        275,292.33
23        679,017.49        326,018.09
24        738,230.76        380,193.21
25        801,470.53        438,052.23
26        869,010.60        499,845.66
27        941,143.40        565,841.05
28    1,018,181.23        636,324.12
29    1,100,457.63        711,600.04
30    1,188,328.83        791,994.73

What do we see here? During 30 years, our yearly 13,040 saving has grown to EUR 1,188,328! The beauty of compounding! Now the right side of the chart didn’t do bad either, but still couldn’t catch up.

The difference is this big due to the low mortgage rate. In case we would increase the interest rate to 6.8%, the second scenario would just catch up in year 30. You would need a pretty high interest rate to turn the numbers more clearly to the favor of the second scenario.

You might want to see the effect of some other terms, so let’s compare in a graph the 30, 25, 20 and 15 years mortgage lengths:


This chart further confirms that the longer the mortgage term is (unless it’s a high interest rate environment), the more beneficial the end numbers will be.

Now I appreciate that you might just want to get rid off your mortgage as soon as possible and don’t want to have this debt for 30 years. This is also an understandable approach. I would still recommend choosing the 30 years term and here’s why:

Scroll back to the table and you will see that the invested extra savings have generated EUR 322,680 by the end of year 15. How much your outstanding mortgage amount will be at the same time? EUR 237,029! Now if you want, you can even pay off your mortgage and still have EUR 85.6k left (bear in mind that depending on your mortgage conditions your bank might charge penalty for the early repayment)!

So are you planning to pay off your mortgage in 15 years? Get a 30 years mortgage! 🙂

What are your thoughts on the above? Feel free to comment!


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Disclaimer: This post or any other information on the site is not intended to be and does not constitute financial advice or any other advice. I am solely sharing my idea, plan and progress on early retirement.

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