Is It Better to Borrow More and Repay Over a Longer Term When Financing a House?
It varies from person to person.
Suppose A lends you money at a 3% return rate, and you take it on—why? Because you know you can pass it to B right away and collect 4%. If you have B, you’ll snap up every opportunity available; the more you grab, the bigger your edge.
But what if you don’t have B?
Imagine a house costs 100, and you have 100 in cash. Do you pay just 30 or settle the full 100? That depends on you—and on whether you can put the remaining 70 to work earning a higher return.
If you keep that 70 sitting in a bank account, what’s the point of taking out a loan? What are you trying to prove? Are you doing it for the thrill of paying the bank the spread between borrowing and lending rates, just so you feel satisfied?
However, if your returns significantly outpace loan interest, then of course you want to hold onto that 70 for as long as possible.
Forget about whether you choose equal principal and interest repayments or equal principal repayments—the longer the repayment period, the better; the less you pay upfront, the better. After all, the interest you’ll end up paying on the money you’ve retained stays roughly the same, while your returns on that cash in hand remain well above loan interest.
Enjoying the spread is always better the longer and wider it is—that’s really all there is to it.
So why do some people pay in full while others pay off early? Because they lack B—maybe they have him one moment and not the next. When they don’t have B, they realize borrowing isn’t worth it and pay it off instead.