[ENG] 40 or 50 year mortgage? A real good deal… but just for the bank
Many banks now have started to develop longer-duration mortgages. I think, in Europe, this trend begun mainly in the UK, where real estate prices raised before than in the rest of Europe, but now is widespread in many country, included Italy, and now you can have even a 50 years mortgage. Maybe it’s a sign of times: once people left the house to their sons, today they can bequeath their mortgage to them.
But, beside these considerations, long term mortgages are never favorable. In fact, they just cost much more. Most people think that if they double the duration of the mortgage, they will also cut by half the monthly installment. This is not true: as matter of fact, if you lengthen the term of a mortgage, you also increase the interests you have to pay. But you also need to consider that every installment you give back a small part of the money you’ve borrowed, and you pay the interest for the money you still have to refund. Therefore, each installment have a different principal/interest ratio: interest lower little by little, since you have less money to refund. But most important, interest are payed mostly at the beginning, and principal mostly at the end of the mortgage. You can see it well in this image (blue area=interests; red area=principal)
Therefore, if you lengthen the term of the mortgage, you may have to pay so much more interest that the monthly installment does not significantly lessen. This depends from the interest rate: the higher they are, the less favorable is a longer duration. In the graph below, you can see a simulation of how the installment changes varying the mortgage duration, with different interest rates (between 4,5% and 6%): as you may notice, the curve becomes nearly flat quite early, and even between a 25 year and a 30 year duration you can have a small difference in the installment.
Banche e Risparmio [http://www.banknoise.com]