Dubai: When choosing to finance your new home with a new loan, you will be faced with a key decision that all home loan borrowers face: choosing between a 15 or 30 year mortgage.
“Whether or not you’re buying a house for the first time, you need to consider whether it makes more sense for you to get a 15-year mortgage or a 30-year mortgage,” said Dubai-based property consultant Andrew Bailey. .
“While you also have to decide if you want a fixed rate loan or an adjustable rate loan, the first big decision you will make is the length of your mortgage. Ultimately, the decision is usually made based on monthly cash flow. »
The first big decision you make is the term of your mortgage. Ultimately, the decision is usually made based on monthly cash flow
-Andrew Bailey
What is the biggest advantage of a 15 year mortgage?
Bailey agrees that the biggest benefit of the 15-year mortgage is that you can save money over the life of your home loan. “Not only do you have the loan for a shorter period, but you also generally have a lower interest rate,” Bailey added.
Consider a loan of 200,000 Dh. A 15 year mortgage has a fixed rate of 2.6% and a 30 year mortgage has a fixed rate of 3.4%. This calculation does not include insurance and other costs that might come with a mortgage, such as utilities and maintenance.
With a 15-year mortgage, your total on this loan would be Dh241,742.46. The total on a 30 year mortgage would be Dh319,306.49. You can see that you save a lot by choosing a 15 year mortgage. Plus, you pay off the mortgage much faster.
“It can be a great choice for someone who wants to save money and pay off the house as soon as possible,” Bailey explained. “The main disadvantage of a 15-year mortgage is that you have a higher mortgage payment.”
In our scenario above, the monthly payment over 15 years is Dh1,343.01. This does not include other costs, such as insurance, utilities and maintenance. Compare that to the monthly payment of Dh886.96 that comes with a 30-year mortgage.
30-year mortgages are popular mainly because they are more affordable on a monthly basis.
What is the profitability of a 30 year mortgage compared to a 15 year one?
30-year mortgages are popular mainly because they are more affordable on a monthly basis. “When you get a 30-year mortgage, you can usually reduce between Dh300 and Dh500 per month, depending on the interest rate and the size of the mortgage,” said Rupesh Naish, a debt consultant based to Dubai.
“For someone starting out, a 30-year mortgage is desirable because it makes the house more affordable. Many first-time home buyers struggle to meet the monthly payment associated with a 15-year mortgage.
Another benefit of a 30-year mortgage is that you have a degree of flexibility, even though you can afford the payments associated with a 15-year mortgage.
Several experts recommend, in particular, repaying a 15-year loan with your 30-year mortgage. This means that even if you have a lower monthly payment, you can pay more each month, by applying the supplement to the principal (main borrowed amount).
“If you’re interested in repaying your loan as quickly as possible, there’s nothing stopping you from making payments as if you had a 30-year loan. If you are having financial difficulty, you can stop making your additional payment and revert to the payment you agreed to,” Naish added.
“With a 15-year mortgage, you’re stuck with that higher payment no matter what. If you miss payments due to financial hardship, you run the risk of foreclosure. If all you need is Dh300 or Dh400 respite for the month and you’re used to making 15-year payments on your 30-year mortgage, you have the option of reducing without compromising your credit rating. credit or your house.
For someone just starting out, a 30 year mortgage is desirable as it makes the house more affordable
-Rupesh Naish
How do I decide which mortgage to get – 15 or 30 year loan?
Whether you choose a 15-year mortgage or a 30-year mortgage, it’s important to make sure you can manage your payments now. “Even the lower payments associated with a 30-year mortgage can be a problem if the mortgage is barely affordable for you,” Bailey added.
“In some cases, it’s just looking at the numbers. Can you afford the monthly payment with a 15 year mortgage? Otherwise, you have no choice but to opt for the 30-year mortgage. You can finance a 15-year mortgage, with a lower rate and a higher payment, once your income situation has improved.
“However, if you have income flexibility, weigh the pros and cons. Decide what is most important to you. If paying off your mortgage as quickly as possible is the most important consideration for you, a 15-year mortgage will force you to discipline yourself to make those payments.
At the same time, however, a 30-year mortgage can allow you the same ability to make additional payments while giving you a level of flexibility in your payments.
“Another consideration is whether or not you really need to pay off your mortgage that quickly. While it sounds nice in theory to pay off your mortgage in 15 years, while building equity, for many it’s not a particular concern,” Naish said.
“If you can lock in a low interest rate for 30 years and then invest the money you save each month on the 15-year payment, you may actually come out on top, depending on market conditions.”
For those who want to maintain cash flow flexibility, the best option is a 30-year mortgage.
At the end of the line ?
For those who want to maintain cash flow flexibility, the best option is a 30-year mortgage.
Some peace of mind also comes with a 30-year mortgage, since you know you might be able to handle a payment in the event of an emergency.
However, if you want to secure a lower interest rate, pay less, and get out of your mortgage sooner, a 15-year mortgage might be the best choice.