Financing the purchase of a single-family home: Lower interest rate or longer term?

We also had a first meeting this week with a broker. On the topic of low interest versus longer term, he had an interesting hypothesis. He clearly advised a shorter term with the following reasoning: If the interest rate in 10+ years is far above today’s level, banks wouldn’t be able to afford the low fixed interest rate anyway. Similar to the issue with building society savers, where building societies terminated old contracts because they could no longer pay the old attractive interest rates, and in the end the customer was stuck with the shorter term despite a valid contract.

What do you think of this hypothesis? The basis for such decisions is obviously the assumption to comply with law and contracts, but he does have a point somewhere…. probably not at an interest rate of +0.5 but maybe at +5,6,7,...

Had a first meeting this week as well

What do you think of the thesis?

I would rather suspect that he wants to downplay the loan costs for you at the conclusion – "Look, with 10 years and 1% repayment, it's absolutely cheap.." ;)

Otherwise, you can calculate yourself in which scenario you come out better – assuming 5.5% construction interest rate in 10 years, as the advisor said:
- you have a contract for 20 years and don't have to do anything. You stay at 1.3% interest.
- you let yourself be sold a contract with a 10-year term. Now you have to refinance. The interest rate level is high, the values for houses have correspondingly declined. You tried to repay the loan properly at the favorable conditions of back then, but even after 10 years there is still a poor loan-to-value ratio – after all, you bought at peak prices, and thus over the years repaid a lot of margin that is now missing in the valuation.

Or the interest rate level remains constantly low, property prices continue to rise, and the follow-up financing becomes even cheaper because the loan-to-value ratio is very low. Who really knows for sure?
Fear of the unknown is a bad adviser for customers.

Yes, but that was not the case the customer advisor argued with. It's just the best case. If it occurs, you can terminate your 20-year contract and still benefit from the still paradisiacally low interest rate after 10 years. The only question remains about the probability of this scenario, given that interest rates are already rising again. It has nothing to do with fear, but with risk assessment. Of course, it could also be that there will soon be negative interest rates for real estate, and the government throws in a new WP+solar roof on top. Who knows? The only question is - how do I protect myself against the unpleasant cases, and what does it cost.

What exactly does he want to “sell” you?

Otherwise, you can calculate in which scenario you come out better – assuming 5.5% construction interest in 10 years, as the advisor said: - you have a contract for 20 years and don’t have to do anything. You stay at 1.3% interest.