People looking to buy a home can, for the first time in almost two decades, take out a mortgage with a 40-year term. This helps create financial breathing space in the short term, but there is one downside.
In Belgium, the average term of a mortgage loan is between 10 and 25 years, with most having a maximum term of 30 years. But insurer Vivium is now offering future buyers a home loan with a 40-year term with a fixed interest rate of 3% through credit broker Hypotheekwinkel, De Tijd reported. This marks the first time since the financial crisis in 2008 that mortgage loans with such a long term are available.
The new home loan is mainly aimed at young prospective buyers or builders in light of skyrocketing property prices. House prices in Belgium have gone up by 25% since 2019 to around €330,000 on average, while the average cost of a flat increased by 20% to just below €270,000.
Meanwhile, even though interest rates have gone down slightly, spurring a recent rush on property among younger people, borrowing has become significantly more expensive, while a greater chunk of people's monthly income is going towards a home loan. These factors combined are making it difficult for many to buy their first home.
Lower monthly cost
Ordinarily, the interest rate on a mortgage increases with a longer term, however, Vivium is marketing its loan at a fixed rate of 3%, not much higher than the average rate for a 20-year term.
At this rate, it helps to reduce the monthly burden. For example, anyone borrowing €250,000 at 40 years will have to pay off just under €890 a month at that rate. If the term is lowered to 25 years, the monthly repayment rises to €1,180, or €290 a month more.
However, future home buyers still need to do their homework, as there are several conditions attached to the loan rate: the loan amount may not exceed 80% of the purchase price of the home, it must be an energy-efficient home and fire and debt balance insurance must be taken out with Vivium. A failure to meet these conditions will see the interest rate rise.
The fact the loan is tailored to people of young age is reflected in the principle that a mortgage is best paid off before retirement age, highlighting that the 40-year loan is mainly intended for those under 30. The offer is also temporary and is only available to people who sign the purchase deed of the house at the notary before the end of this year, but the ambition is to extend it in 2025 if it proves popular.
Finally, there is one major caveat. The total cost of a loan at 40 years is significantly higher than for shorter-term loans. When looking at the same example from before: at 25 years, the total interest cost is €104,000, while at 40 years it will be much higher, at €176,000. However, people whose wages go up can negotiate to lower the term after several years, which would bring down the total cost.
