How Long Should You Take Out a Loan For?

How long a term should you take on a loan?

I have worked in the real estate sector for 14 years and I often meet different people who are afraid to take out a loan. It seems to them like such a long-term and binding obligation. At the same time, people purchase many small things on installment, lease, or small loans. However, I believe that you should take out a loan ONLY for buying a home, because for smaller things you can save money. By the way, people who don't have small obligations are in a significantly better position with the bank, and their chances of getting a home loan are higher.

Loan calculators usually offer loan periods of up to 30 years, and a person might think that at the present moment they are certainly working and everything is fine, but what happens next?! It is commendable that lending decisions are not made lightly. However, if you rent an apartment for 3 years or more, it would be smarter to buy yourself a real home of your own. This has many advantages.

• Saving money begins immediately after the transaction, because in the current economic situation, apartment rent is higher than the monthly loan repayment. Using Tartu as an example, a 2-room apartment in average condition can be bought for 60,000 euros. The monthly rent for such an apartment is certainly over 300 euros. Of course, this depends on the apartment's location, condition, and furnishings. Meanwhile, the loan repayment for such an apartment (if the loan is taken for the maximum period) falls in the range of 230–260 euros per month. Of course, a down payment or additional collateral is needed, which can become an obstacle for the borrower. But if you can save at least 70–150 euros per month, then it's worth making an effort and finding solutions.
• Having owned a home for 3 years or more, you can say with confidence that such a transaction will also turn out to be a good investment. If we take our previous example where a person borrowed 60,000 euros, then in 3 years the repaid amount is 6,000 euros. Therefore, the obligation to the bank has been reduced to 54,000 euros. Additionally, according to all expectations, the given apartment can be sold for more than the previous purchase price, because apartment prices have risen over recent years. If this same trend continues, then in 3 years you can sell the given apartment for 69,000 euros. In other words, after selling this apartment, you'll have 15,000 euros in pure profit, and if the person has renovated the apartment in the meantime, then perhaps even more. This amount can be used to fulfill your dreams or why not as a down payment for purchasing a new home.
• Another major advantage is that the owner of a real home of their own does not have to coordinate renovation work with the landlord. The landlord may not allow you to drill holes in the wall or change the wallpaper. But if the home is your own, no one can interfere with the renovation work. Additionally, when renting an apartment, a situation can arise where the landlord asks you to vacate the apartment in a short time, but you had just made the apartment cozy for yourself. This can result in unforeseen expenses and inconveniences. In your own real home, you can decide how long you live there.

In conclusion, I want to say that although the obligation is taken for 30 years, the residence can be sold at any time and the remaining loan balance can be repaid to the bank. Life circumstances and needs change more frequently than we ourselves can anticipate. I have clients whose needs have changed every 2–3 years. They have changed homes four times during the time I have known them. Therefore, the home is for us, not us for the home. It should serve us and be a place where we come to rest from our daily activities, recharge our batteries, and spend time comfortably. At the same time, it could also be a smart investment. Not everything can be measured in money, of course. However, it would be wise to make decisions that you won't regret later.

Wishing you wise decisions!

Author: Tiina Leimann. Professional broker at Varavalge Real Estate Agency.