LifestyleMortgagePropertiesThe very long-term mortgage is back in fashion even for foreigners

18 November 20230

Mortgaging beyond 30 years is back in fashion. While until a couple of months ago, in times of absolute no-spending, one could not talk about durations beyond 30 years for mortgage financing, the galloping cost of money, which has risen to 4.5 percent in Europe in a single year, has restored long-duration mortgages (35 to 40 years). And this is for a number of reasons.

Lower taxes

On the one hand, expanding the home loan relationship allows borrowers to reduce the cost of the installment by spreading the expense of financing over a longer period of time, which has a significant impact on the household budget. On the other, it allows prospective buyers to place the installment/income percentage within the 30 percent required by banks to promise the underwriter the ability to meet their repayment commitments.

Managing the situation as best as possible

There is another very important element in choosing a 40-year mortgage: the ability to spread the facility over a fairly extended period of time allows the prospective borrower to obtain an even larger loan from the lender for the same monthly installment. This additional market value allows one to target a much wider range of homes than one could afford with a 20-year mortgage.”

According to some analyses, assuming a household income of 2,900 euros per month, the optimal installment amount for a sustainable, and therefore bank-approved, mortgage loan will be about 950 euros per month. This amount, over 20 years, will allow for financing of about 160,000 euros, which, considering the maximum amount of 80 percent typically approved by financial institutions, would certainly make it possible to aim for a house with an optimal value of 200,000 euros. Alternatively, the same reasoning, transposed to a mortgage term of 40 years, would allow the future consumer to purchase a house with an optimal market value of 288,000 euros.

The amount of square footage

Assuming an average house value in Milan of 5,000 euros per square meter, with a 40-year mortgage versus a 20-year, constant-rent mortgage, one can afford a house of 58 square meters versus 40.Even in Rome, real estate is 40 percent larger. Thinking of a normal cost of 3,300 euros per square meter, actually in financing one would get to buy 87 square meters with a 40-year mortgage compared to the 60 covered with a 20-year financing.While in Naples, house sizes increase from 70 to as much as 102 square meters, obtained with a 40-year mortgage worth 230,000 euros.

The other side

But not everything is without thought. Without a doubt, choosing a long-term mortgage could be a risky choice in a market characterized by stable rates or rather slow development. In fact, the maximum age required by financial institutions for a 40-year mortgage is 36 years. A restrictive age that makes it possible to reach the last mortgage installment at age 76.However, young people who turn to the housing market to purchase their first home commonly look to small, central or two-bedroom houses, depending on their needs at the time. And this, with the goal of selling the home later in life, at the time when a family unit is formed and a larger area is needed.

What if one then changes homes?

Considering that the amortization schedule for home loans stipulates that you spend only the interest rate in the first few years of financing, the risk, if you want to change homes after a handful of years, is that you will have repaid only the interest rate without having capitalized the cost of financing. However, this is an expense that could be amortized through the increased value of the house if you were able to sell the property at a rate significantly higher than the purchase rate. In this case, in addition to the gain in financing, the economic benefit of the home loan would also be based on the amount of money saved by buying and using the home compared to the rent that would have been spent for all the years you resided in the home.

Advice?

It is difficult to give unambiguous advice when dealing with the home loan market. What is certain is that long-term financing today is provided by very few banks, and only one of them allows 100% financing of the value of the home. In other situations, the optimal financing rate is no more than 80 percent of the cost of the property. That said, it is therefore important for a young person, including a foreigner, who is thinking of setting up a home to check the affordability of a long-term home loan versus a loan promised by Consap. There are in fact some substantial differences between these two alternatives. First, the state-promised Consap mortgage can be taken out simply with a lien of 80 percent of the value of the house. For this reason, all those situations of young people who cannot handle the 20% security deposit remain excluded.

Added to this is the issue of collateral

If the amount required does not, in fact, fall within the income guidelines of the Consap mortgage, then one must step outside this boundary and turn to traditional mortgages that allow for additional collateral to be included in the contract. However, there is another possibility in which the Consap-guaranteed mortgage is inappropriate for the needs of a teenager. This is the case of a client under the age of 36 who cannot fit into the installment/income ratio required by banks for loan disbursement. In this particular case, the existence of additional sponsors (such as moms and dads, for example), could enable loan providers to meet the needs of the teenager by increasing the amount of the monthly installment, which will be spread over as long a period of time as possible (in the case, up to 40 years). This would provide sufficient circumstances for disbursement of the loan and completion of the purchase of the new home.

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