Mortgage Duration Dilemma: Lower Monthly Payments or Less Interest?
Extending a mortgage from 25 to 30 years lowers monthly payments by 720 shekels on a 1.5 million shekel loan, but increases total interest by 268,000 shekels.
Choosing the mortgage duration impacts the household budget for decades. A longer repayment period reduces the monthly payment and leaves more money for current expenses, but significantly increases the total interest paid to the bank. The difference can reach hundreds of thousands of shekels.
Comparing 25 and 30 Years
Take, for example, a mortgage of 1.5 million shekels at a fixed annual interest rate of 5%, in a non-CPI-linked track. Spread over 25 years, the monthly payment will be about 8,770 shekels. Spread over 30 years, the payment drops to about 8,050 shekels. A family that chooses the longer term saves about 720 shekels a month, or about 8,600 shekels a year, in current cash flow.
However, this monthly saving comes with a heavy price tag. Over 25 years, the total interest payments will reach about 1.13 million shekels, compared to about 1.4 million shekels over a 30-year period. In other words, extending the mortgage by five years will cost an additional 268,000 shekels.
Managing Monthly Cash Flow
Still, extending the term may be the right decision for some households. A family earning 25,000 net shekels and paying 8,770 shekels a month allocates about 35% of its income to the mortgage. Reducing the payment leaves a safety margin and minimizes the risk of falling into expensive consumer loans.
The decision should be based on the repayment amount that the family can comfortably afford even during periods when expenses increase.
Borrowers can also combine different periods, such as spreading part of the mortgage for 20 years and the rest for 30 years, to balance monthly cash flow and total interest costs.
