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As house price rise, and most people can’t afford higher monthly payments, the inevitable solution is to increase mortgage duration.

But this has effects that bizarre effects. If until some years ago, no bank would have thought to offer a mortgage loan with a duration more than 30 years, now many banks offer 50 years mortgages. If you start a mortgage when you are 35, you end payments when you are 85. But don’t worry: in case the worst happens before, you can bequeath the mortgage to your heirs. We crossed the frontier of multi-generational debt: once, people maybe left the house to their sons, now you can leave them the mortgage to pay. Cool.

But what advantages offer a duration that long? Well, many, for the bank. None, for the borrower. In fact, the longer the duration, the higher interests are (because you borrow money for a longer time): payment decrease is not linear — in other words, if I start a 20% longer mortgage, payments won’t be 20% less.

This is quite clear from the chart that follows, that shows how a €100.000 mortgage payments vary, changing the duration from 5 to 50 years, with four hypotetical interest rates (4.5%, 5.0%, 5.5%, 6.0%). It stands to reason that it isn’t a good value to choose a duration higher than 30 years, since the higher interests wear away possible advantages.

Original post (in Italian): E adesso arriva il mutuo intergenerazionale

Banche e Risparmio [http://www.banknoise.com]