Is the mortgage payment too expensive? Why lengthening the duration is worthwhile: simulations – Corriere.it
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After the 0.25% increase in the cost of money decided by the ECB, the Euribor slowly started to rise again, with the quarterly rate now hovering around 3.6%. Since it is very probable that Frankfurt will carry out another upward maneuver of 25 cents in July, those who have an outstanding variable mortgage, especially one with a long residual term, have something to worry about. Also because by now the subrogation appears to be a choice out of time: the requests for scrapping are increasing, but the percentage of waste would be, according to our sources, very high and the path of renegotiation with one’s institution is also very complicated to follow.
The Italian Banking Association points out in its latest report that in May the average rate of new mortgages to households reached 4.2%, two more points in the space of a year. This is a value that does not distinguish between fixed and variable loans. In the table on the conditions practiced by banks, elaborated by the website of the broker mutuiOnline.it, we see that for a loan of 140 thousand euros over 20 years, the five most convenient institutions as of 15 June offered effective rates below 4%, while for the same loan but with a thirty-year duration, it starts even below 3.5%.
The pros and cons
The atypical rate trend therefore continues, with the cost of loans (determined by the trend of the Eurirs parameter, which measures the cost of money from one year upwards) progressively decreasing for terms over 15 years. A phenomenon that does not occur for variable mortgages, which at 20 years are around 4.5% while 30-year loans are at 4.7%. At this point, if you choose a fixed-rate mortgage, you might ask yourself: having the resources to pay in twenty years, is it worth extending the duration up to thirty? There are pros and cons. The pros are obviously the lower monthly amount and, a not negligible factor today, inflation which ends up eroding real spending. There are two cons: the total nominal expenditure rises a lot, the debt is reduced less. Let’s see concretely, assuming a mortgage of 150 thousand euros over 20 years at 4% and one over 30 at 3.8%. The 20-year mortgage costs 909 euros per month, the thirty-year 699; the total expenditure for the twenty-year anniversary is 218,153 euros, for the thirty-year anniversary it rises to 251,617, with an increase in expenditure of almost 33,500 euros. If you want to pay off after five years, the twenty-year has a residual debt of 122,886 euros, the thirty-year of 135,228; in the event of extinction after 10 years, the twenty-year old has a residual debt of 88,779 euros, the thirty-year old of 117,371. It is therefore necessary to pay out almost 28,600 euros more.
Three examples
The level of interest rates, although high, is compatible with the disbursement of mortgages for young people up to the age of 36 and guaranteed by the public fund managed by Consap. At a fixed rate, it is possible to take a 100% 30-year mortgage at around 4%, half a point more for variable rates. Among the amendments to the omnibus decree already approved in the Chamber there is also the extension of the guarantee for another three months, until 30 September. What would happen to the variable mortgages already in progress if instead the increase in the cost of money were to fall entirely on the value of the Euribor, bringing it to 4% (the ECB rate)?
Let’s look at three examples. Let’s start with a 200,000 euro 25-year loan that started at 1.61% 10 years ago with an installment of 810 euro. With the 4% Euribor, the new monthly outlay would rise to 1,192 euros. The same mortgage per party in 2018 at a rate of 1.07% (remember that the Euribor had a negative value for almost 5 years) had an initial installment of 760 euros which today could reach 1,284. Finally, the worst case scenario: a loan of 200,000 euros again but thirty years old and started only two years ago, at a rate of 0.97%. The first installment was 705 euros, the risk of having to pay 1,401, practically double.
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