Does paying off your debts make you rich? A myth to debunk!
This famous saying was certainly true 40 years ago, when interest rates were around 12%. At that time, taking on debt meant incurring very high financial costs. Today, despite the relative rise in rates observed over the last two years, they remain generally low (see BNB statistics). Debt is therefore no longer necessarily a burden, but can instead become a real financial lever and a long-term opportunity.
More and more Belgians are interested in alternative solutions such as 30-year loans in Belgium or 40-year loans in Belgium, which offer unprecedented budgetary flexibility. Rather than using all your savings to finance a project, borrowing allows you to keep your capital for other opportunities and thus optimize your return.
In rental real estate, for example, awell-structured loancan generate two sources of income: on the one hand, rental income that covers all or part of the monthly payments, and on the other hand, the increase in the value of the property over time. Thus, when managed properly, debt can be a particularly effective tool for building wealth.
The advantages of a long-term loan
Why can taking out a long-term loan in Belgium be a smart move?
1. Enjoy the benefits of a lower monthly payment
A long-term loan (over 30 or even 40 years) significantly reduces monthly payments. This eases the immediate financial burden and allows for better management of your monthly budget. With lower monthly payments, it becomes easier to consider other investments, build up savings, take longer vacations, or allocate a larger budget to leisure activities.
Let's take the specific example of a 30-year-old couple taking out a loan to purchase their first property:
- Option 1: a loan of €250,000 over 20 years at 2.85% results in a monthly payment of €1,363, for a total amount repaid of €327,182.
- Option 2: extend the term to 37 years (= retirement age). The rate drops to 3%, but the monthly payment falls to €956, a difference of more than €400 per month. Admittedly, the total amount repaid is higher (€411,652, or nearly €85,000 more), but the monthly burden is significantly reduced, making it easier to manage your budget and/or expand your investments.
2. Optimize your savings capacity and diversify your investments
Beyond simply reducing monthly payments, a long-term loan allows you to spread out your investments and keep some of your savings for other projects. Investors can thus diversify their assets between real estate,financial investments, or other high-yield opportunities.
Considering the example above, if you save the €400 difference between the 20-year loan and the 37-year loan, assuming an average return on savings of 4% per year (based on a balanced investor profile) this will result in savings of €142,308 after 20 years and €400,571 after 37 years. In this context, the additional repayment cost of €85,000 for the long-term loan will be more than offset!
3. Become a homeowner sooner with long-term credit
A long-term loan also makes it possible to become a homeowner sooner, particularly for young professionals who often start their careers with modest incomes but whose financial situation will improve over time. Rather than waiting years to save up a substantial down payment in order to reduce the amount of the loan and therefore the monthly payments, they can consider buying now thanks to the extended repayment period and thus benefit from a gradual increase in the value of their property.
Let's return to the example of our young couple:
- Option 1: they buy a property today for €250,000 with an estimated capital gain of 2.5% per year (a reasonable assumption based on historical trends). The property will therefore be worth around €623,000 in 37 years (when they retire). The estimated capital gain is therefore €373,000!
- Option 2: They decide to wait 10 years before buying the same type of property. It will then be worth around €320,000 and will require a larger investment. In addition, the capital gain at retirement age will decrease to €303,000.
Buying your home earlier also means a quicker change in status from tenant to homeowner, putting an end to rent payments that generate no return on investment. Indeed, paying rent every month is tantamount to enriching your landlord without ever building up any assets.
Over a period of 10 years, rent of €1,000 represents a total expenditure of €120,000 paid out without any return on investment. Conversely, a purchase made using credit, although subject to interest, allows each monthly payment to be converted into capital accumulated through the acquired property and to obtain additional profitability through future capital gains.
Over time, those who bought earlier will therefore enjoy greater overall capital gains, simply by having anticipated their purchase and benefited from a longer period of appreciation. Waiting to save up so that you can borrow later ultimately amounts to "throwing away" your money on rent and losing out on some of the potential capital gains on the property that could have been acquired earlier thanks to a long-term loan!
4. Access to a higher category property
If the priority is not to reduce the monthly payment, but rather to optimize purchasing power, it may be wise to extend the term of the loan while maintaining the same monthly payment. This allows the borrower to purchase a larger, better located, or higher quality property.
For example, instead of buying a 60 m² apartment on the outskirts, a young couple could afford an 80 m² apartment closer to the center, offering better long-term value and higher rental returns.
Let's take another look at a specific case:
- With a monthly payment of €1,363 over 20 years at 2.85%, the possible loan amount is €250,000.
- By maintaining this monthly payment but extending the term of the loan to 37 years with a rate of 3%, the principal borrowed increases to €367,500.
This means that, without any additional financial effort in terms of monthly payments, the borrower can access a more expensive property with greater potential for enjoyment, appreciation, and return on investment!
5. Benefit from the positive effect of inflation
Inflation erodes the value of money. In fact, €1,000 today will not be worth the same in 30 years. By borrowing over a long period, you repay a debt with money that decreases in value over time, which lightens the real burden of the loan. Thus, what you repay in 20 or 30 years will represent a much lower burden in terms of purchasing power.
Example:
Assuming an average inflation rate of 2% per year, a monthly payment of €1,000 today will have a much lower real value in the future:
- In 10 years, this monthly payment will be equivalent to €820 in current purchasing power.
- In 20 years, it will only be worth €673.
- In 30 years, it will fall to €552, almost half its current value.
Therefore, by borrowing over a longer period, you pay monthly installments that gradually lose their economic weight over the years. This means that the actual repayment effort decreases over time, while income tends to increase. In other words, a long-term loan allows you to take full advantage of the effect of inflation, making your repayments much less burdensome over time.
Flexibility and early repayment
It is important to remember that a long-term loan is not set in stone! In fact, very few loans reach their initial maturity date. Mortgages can be adjusted or paid off depending on changes in your financial or family situation.
In the event of inheritance or receipt of a windfall, for example, it is possible to repay all or part of the outstanding capital early (more information about your rights here). The term can also be reduced (and therefore the monthly payments increased) if your income increases. It remains to be seen whether this is really a good idea, or whether reinvesting the positive monthly difference or the inherited capital in another project would not be more profitable...
Common misconceptions about debt
Many people still think that taking out a 30- or 40-year loan is a bad idea. However, it all depends on the strategy adopted. A well-structured long-term loan offers financial flexibility and allows you to take advantage of the positive effects of time and inflation.
Of course, debt must be controlled and carefully considered. It is essential to choose an attractive interest rate, anticipate additional costs (insurance, application fees, etc.) and take a long-term view.
A lever to be used wisely
Far from being a hindrance, debt can be a powerful lever if used wisely. Borrowing over a long term allows you to invest earlier, spread your capital more effectively, and optimize your overall return while enjoying greater financial flexibility.
Whether you want to buy your primary residence or invest in rental property, a good debt strategy can make all the difference!
Want to optimize your financing? Contact an RGF Group expert to analyze the best approach for your situation!
By Julie G
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