When preparing to buy a property in Luxembourg, the interest rate naturally attracts all the attention. Yet another factor can have a considerable impact on your financing: the term of the mortgage.
Should you borrow over 20 years to limit the cost of the interest? Choose 25 years to strike a balance? Or spread the loan over 30 years to reduce your repayments and increase your buying power?
There is no ideal term that suits every borrower. The right choice depends on your income, your age, your deposit, the size of the project and your objectives.
Why does the mortgage term matter so much?
The term directly determines how you will repay your loan.
For the same amount and the same rate, the shorter the term, the higher the repayments. In return, you generally pay less interest in total.
Conversely, extending the term reduces the repayments but generally increases the overall cost of the financing.
A balance therefore has to be struck between:
- what you can repay each month;
- your property budget;
- the cost of the credit;
- your standard of living after the purchase;
- your future plans.
Borrowing over 20 years: to reduce the cost of credit
Financing over 20 years lets you repay the capital relatively quickly.
Its main advantage lies in reducing the overall cost of the credit compared with a longer term at the same rate.
This term can suit borrowers whose income is high enough to sustain larger repayments.
It can also be attractive where the amount to be financed remains reasonable relative to the household’s resources.
High repayments can, however, reduce your buying power.
Choosing 20 years purely to save on interest is therefore not always the best decision if it unbalances your day-to-day budget.
Borrowing over 25 years: the compromise?
For many property projects, 25 years can represent a compromise between the repayment and the overall cost.
Adding five years compared with a 20-year loan reduces the monthly repayment.
That difference may allow you:
- to increase your borrowing capacity;
- to keep more headroom each month;
- to build up a contingency fund;
- to consider a property that better matches your needs.
In return, you repay the loan for longer and its overall cost may be higher.
The choice should therefore be made on the basis of precise simulations.
Borrowing over 30 years: why choose a long term?
Given property prices in Luxembourg, some buyers may be tempted to stretch their financing further still.
The main benefit is simple: spreading repayment over a longer period reduces the monthly instalments for the same amount and rate.
This approach can make home ownership easier for some households, particularly where the sum involved is large.
But several factors have to be taken into account.
A longer loan generally means more interest and commits you financially for a longer period.
Access to a long term also depends on your profile and on the terms offered by the financial institutions.
Example: the impact of the term on a €500,000 loan
Take financing of €500,000.
At the same rate, the principle is as follows:
Over 20 years: a higher repayment, but faster amortisation and generally lower interest costs.
Over 25 years: a lower repayment, with a higher total cost.
Over 30 years: a lower repayment still, but a longer commitment and potentially higher overall cost.
This example shows why you should never compare repayments alone.
A lower repayment may look immediately attractive, but you also have to look at what the financing will cost over its whole term.
Does a longer term let you borrow more?
It can indeed increase your borrowing capacity in certain situations.
By spreading the repayment, the instalment corresponding to a given capital sum falls.
That can allow you to finance a larger amount while keeping a repayment compatible with your budget.
This is precisely why the term is one of the parameters examined in a mortgage simulation.
A word of caution, though: being able to borrow more does not necessarily mean you should use all of that capacity.
Your financing must remain compatible with your other plans and your standard of living.
Does your age influence the loan term?
Yes, the borrower’s age can influence the financing solutions available.
The bank does not look only at your age when you apply. It is also interested in your situation at the end of the repayment period.
A 30-year loan taken out relatively young clearly does not present the same picture as financing of the same length taken out much later.
Future income, the move into retirement and insurance conditions can also enter into the assessment.
Should you choose a short term if you have a large deposit?
Not automatically.
A large deposit reduces the amount to be financed, but that does not necessarily mean you should choose the shortest possible term.
You may, for example, prefer to keep a comfortable repayment so as to carry on saving or to finance other plans.
Conversely, some borrowers will favour faster repayment in order to limit their long-term indebtedness.
This is more a matter of personal financial strategy than a general rule.
Be careful not to look at the rate alone
Two mortgage offers should not be compared solely on the advertised rate.
The term strongly influences the cost of the financing.
You also need to take into account:
- the total amount of interest;
- the fees attached to the financing;
- any insurance;
- the guarantees;
- the early repayment options;
- the conditions attached to the loan.
An offer with a slightly lower rate is not necessarily the solution best suited to your situation.
Can the term of your loan be changed later?
Depending on the contract and the options offered by your financial institution, certain changes may be possible during the life of the loan.
A partial early repayment, for instance, can reduce the outstanding capital.
But the arrangements and any costs depend on the contract you signed.
If you expect to receive a significant sum in a few years, or if your income is likely to change considerably, it can be worth factoring that in as early as the financing negotiation.
20, 25 or 30 years: which term is ultimately best?
The best term is not necessarily the shortest.
Nor is it systematically the one that produces the lowest repayment.
The right term is the one that lets you build financing consistent with your situation.
The following in particular should be taken into account:
- your current and future income;
- your deposit;
- your age;
- your capacity to save;
- the price of the property;
- your family situation;
- your other plans;
- how comfortable you are with debt.
Compare several scenarios before choosing
Before committing, it is best to compare several simulations.
What happens if you borrow over 20 years rather than 25? How much do you actually save? What difference does it make to the repayment? And what property budget becomes accessible by moving to a longer term?
These comparisons let you decide on the basis of figures rather than impressions.
Prêt Immo supports you with your property financing
At Prêt Immo, we look at your project as a whole in order to find a financing solution suited to your situation.
The choice of term is an integral part of that analysis.
The aim is not simply to obtain the lowest repayment or the shortest term, but to build financing consistent with your budget and your plans.
Are you thinking of buying a house or a flat in Luxembourg?
Have your borrowing capacity assessed and compare different financing scenarios with Prêt Immo before you commit.
To go further, discover the solutions Prêt Immo offers for your mortgage in Luxembourg.
