When you take out a mortgage, do you mainly focus on the margin and interest rate? Or maybe you are also considering other components such as commission or insurance costs? Look at one more important issue! Equal and decreasing installments, which in the case of a long-term mortgage have a key impact on the costs incurred. Which of them are more profitable and will allow for conscious management of the financial budget?
Hello, mortgage installment!
Before proceeding with the choice of equal or decreasing installments, it is worth understanding – what a mortgage installment is at all. Simply put – this is the amount that the borrower must pay to the bank every month as part of repayment obligations. Each of these installments consists of a capital part, i.e. a fraction of the borrowed amount and an interest part – which is the institution’s remuneration for providing the loan.
Each time, the amount of the monthly installment depends on:
- Mortgage amount
- Loan period
- Interest rates
- Choice of installment option
The level of interest itself, ie the Real Annual Interest Rate it is conditioned by the bank’s margin, which is unchanged throughout the repayment period, as well as the interest rate. The latter is an indicator of the interest rate, which has been stable for several years – 1.60-1.73%. This does not mean, however, that in the near future it will be similar. It is very likely that during the term of the loan, over a dozen or so or several dozen years – the interest value will increase or decrease by several percentage points. This, in turn, will affect the final installments payable in USD! Mortgages taken in foreign currencies are determined by the rate.
Based on these calculations, the lender calculates the applicant’s creditworthiness, ie the amount that he is able to borrow. Importantly, when choosing a high loan amount, you must choose a long loan period and equal installments, which at the initial stage of debt repayment are much lower than decreasing installments.
Equal installments – extremely popular, but beneficial?
Equal or annuity installment is the most popular option among crowds of borrowers. This fact may be affected by the name – it means that the monthly loan installment has a fixed amount. This is not entirely true. Mortgages have the variable interest rate. It depends on the level of interest rates set by the Monetary Policy Council and the value of money in the economy. Under their influence, equal installments may change … Fortunately, the loan agreement contains information about the frequency of changes in loan installments, relative to the interest rate. See interest 1M, 3M, 6M. Moreover, some banking institutions propose a fixed interest rate for the first few years. Thanks to this, the borrower can be sure that every monthly commitment will be kept at the same level.
Yes, when taking out a mortgage with a repayment schedule in equal installments – the installment has a fixed amount throughout the loan period. In the initial stage consists largely of interest, which is why it is several percent smaller than the decreasing installment. However, as the repayment period expires – the capital part begins to increase, while the interest part decreases. In practice, this means that at the end of paying off the debt – equal installments consist mainly of the capital and only to a small extent interest.
Decreasing installment – jump from a high threshold!
The system of decreasing installments, although recommended by many credit advisers, is chosen by a small part of people – In this case, the loan repayment scheme decreases with the next monthly installment. It should be mentioned that the capital part throughout the entire loan period remains unchanged and the importance of the interest part is gradually decreasing.
Why is this happening? Well, the bank charges interest on a decreasing capital from month to month. And this means that after a few or several years, the decreasing installment equals the equal installment – and in subsequent periods it becomes lower and lower! Of course, this rule will be implemented, provided that the interest value remains unchanged – because, if interest rates increase, the amount of the decreasing amount may increase significantly …