The question of what mortgage term to apply for is as common as the question of whether to buy an omelet with or without onions. Is it better to opt for lower payments for a longer period, or make an effort to pay off the house in fewer years and save on interest? In this article, we’ll help you resolve this financial dilemma with practical examples, so you can choose the best possible option. Calculator in hand, and… let’s get started!
The key differences when choosing a mortgage term
Both 20-year and 30-year mortgages are very popular, but they have important differences. To put it simply, there are two main differences: what you pay each month and what you pay the bank in total. Choosing between 20 and 30 years involves a balance between the convenience of more affordable payments and the total interest cost you’ll end up paying.
Therefore, choosing the right term is key to finding an affordable monthly payment without overpaying . Let’s break down the key points and other effects of choosing one term or another.
Monthly payment: higher payments vs. lower payments
One of the main points to consider is the difference in payment terms: with a 20-year mortgage, monthly payments are higher . With a 30-year mortgage, however, the payment is divided into more installments, resulting in lower monthly payments. In other words, extending the term gives you a monthly break, while shortening it requires more effort each month.
For example, imagine two people borrowing the same amount. The one who chooses to repay over 20 years will have to repay the money in 240 installments , while the 30-year mortgage will do so in 360 installments . Logically, by spreading the debt over more installments, each installment of the 30-year mortgage will be significantly smaller than the 20-year mortgage, even after adding the interest.
This makes the 30-year option attractive if you’re looking for a more comfortable monthly payment that better fits your monthly income. However, by paying more monthly installments, you’ll end up paying more total interest.
Total interest: How much more would you pay by extending the term?
The other side of the coin is the total interest you’ll end up paying on your loan. How much more? It depends on the amount and the interest rate, but it can add up to thousands of euros more. In fact, with a constant fixed interest rate of 2.5%, a €200,000 mortgage for 30 years would generate around €84,487 in interest—more than double the interest you would pay if the same mortgage were for 15 years, for example.
Why does this happen? The standard amortization system (called the French method) means that at first you pay mostly interest and little principal. If you have 30 years ahead of you, you’ll be paying mostly interest for many more months, and it will take longer to pay off the debt . However, over 20 years, the interest payment period is shorter.
Nor should we forget the time factor itself . Aside from the total amount of payments and interest, taking out a mortgage means taking on long-term debt: you’ll be tied to the bank for two or three decades. This can also hinder saving or investing in other personal projects.
Why should you be flexible with the deadline?
You may already have a term in mind, but when it’s time to talk to your bank, you find a more attractive option . You may also decide, for various reasons, to refinance your mortgage and change the term . Let’s delve into these elements in a little more detail:
Negotiate the conditions with the bank
When applying for a mortgage, don’t take anything for granted: your terms are negotiable. Here are some tips to help you get the best deal possible:
- Compare several offers: This is a tip that can be applied to virtually any deal. Avoid settling for the first bank that says yes; request simulations or do them online and compare them point by point: interest rate, opening and cancellation fees, etc. There may be banks that can offer you a more attractive deal even if you change the term you had in mind.
- Play with the link: sometimes, by bringing in your payroll or taking out home insurance, banks can change the interest rate by a few tenths of a percent. Be realistic, though. Buy products you’ll actually use, or you’ll end up paying more than you save.
- Negotiate fees : Often, opening, review, or early repayment fees are flexible if you’re a good customer or have a credit rating.
How does refinancing work?
Agreeing on a term with your bank doesn’t mean the same amount of time will always be on the table. To achieve this, you can consider mortgage novation or subrogation and change the initial terms of your loan.
With novation , you negotiate improved terms with the bank yourself. It usually involves less paperwork, but the bank doesn’t always agree to renegotiate without a good reason. In the case of subrogation , you change banks to take advantage of a more attractive offer.
Examples and guides for choosing a mortgage term
To better visualize the difference between a 20- and 30-year mortgage term, nothing beats a simulation with hard numbers. To do this, let’s imagine the bank lends you €160,000 at a fixed 3% APR (Nominal Interest Rate). Using a mortgage simulator, we get approximately:
- 20-year mortgage: You would get a monthly payment of around €880 and approximately €53,000 in interest generated over those 20 years.
- 30-year mortgage: Your monthly payment would be around €670 and a total of €83,000 in interest.
In this case, the difference in monthly payments is about €210 less with the 30-year mortgage, which, at first glance, sounds great on a monthly basis. But the downside is that you’d end up paying €20,000 more in interest by extending the term.
Experts estimate that, for an average mortgage, adding 10 years to the term (from 20 to 30, for example) lowers the monthly payment by about €100-150, but adds around €20,000 in additional interest . For larger mortgages, each additional decade can save you between €300 and €400 a month, but every 10 years added to the term costs us around €40,000 more in total interest.
Financial tip:
If you already have a long-term mortgage, one strategy to avoid paying so much interest is to pay off your mortgage early by reducing the term. Many Spaniards, as soon as they accumulate some extra savings, choose to cut the years off their mortgage instead of lowering the payment, as this saves them more interest . However, be sure to check the potential early repayment fees.
A detailed comparison of a 20-year vs. 30-year mortgage
We’ve prepared a table summarizing the advantages and disadvantages of a 20-year mortgage versus a 30-year mortgage , so you can compare at a glance what each option offers:
A quick checklist for choosing the best mortgage term.
You may find it easier to know which option to choose if you list your priorities or preferences. Finally, we offer a quick checklist to help you navigate. Jot down the factors that apply to you, and they’ll help you determine whether a 20- or 30-year mortgage term is better for you:
- Your priority is to pay as little interest as possible : If you want to minimize the total cost of your home and don’t mind tightening your belt, opt for the shortest term you can afford.
- You set a low monthly payment upfront: Even if that means more years of paying, if you need to reduce your monthly payment to make ends meet, a longer term will give you that breathing room.
- Your income allows you to afford a short term: If your borrowing capacity is low and your income allows you to afford the 20-year payment without exceeding 35% debt, you can go for that mortgage term. If not, a 30-year term may be a safe option.
- You have other important expenses : a mortgage rarely comes alone, perhaps you’re still making car payments or repaying a loan . The more additional financial burden you have, the more prudent it is to choose a long-term mortgage to avoid overburdening yourself.
- Consider your age : Ask yourself this question: «How old will I be when I pay off my mortgage?» You may be planning to enjoy a few years without the burden of debt before retirement.
- Job security and emergency savings: If you have a stable job and a good emergency fund , you can more easily opt for a shorter term. If your situation is unstable or you don’t have a solid safety net, it’s wiser to choose a longer term.
- Consider your life plan and goals : Are you planning to stay in the home long-term, or are you likely to sell it in a few years? For shorter stays, a shorter mortgage helps you build equity quickly. If this is your permanent home, you can prioritize long-term comfort.
- Evaluate the term based on your financial personality : If having debt keeps you up at night, you’ll prefer to get out of debt as soon as possible and choose a 20-year mortgage. If you manage your debt well and prefer to use money for other things in the meantime, you can easily consider 30 years.
- Compare offers and simulate scenarios : sometimes a compromise can be the best option. Use mortgage simulators from banks or financial portals to see how the payment and interest will vary over 20, 25, or 30 years. Having concrete numbers on the table will give you clarity on which term to choose.
