When deciding on a mortgage, the first thought you need to achieve is how to pay installments. Apart from commissions, interest rates, and additional costs, it is one of the most important things that will have a significant impact on the overall cost of the mortgage. Remember that you are indebted for many long years – so when choosing an installment you should be guided by the level of your household budget and the assessment of your creditworthiness. What form of payment of installments will work in your case?
Is installment equal or decreasing? We spread it into prime factors
To understand exactly how the equal and decreasing installments function, it is necessary to know their component parts. A loan installment is nothing other than the amount that the borrower is obliged to pay to the bank as part of the contracted obligation. Each of such installments consists of a capital part, i.e. a small portion of the borrowed sum and interest part – an interest which is taken from interest on borrowed funds.
The amount of the monthly installment depends on:
- Mortgage amount,
- Loan period,
- Interest rates,
- Type of installments
Based on the above-mentioned factors, the bank calculates the customer’s creditworthiness – and therefore the maximum amount that he can credit. In practice, this applies only to the amount of the first installment – because if you want to get the highest amount you should choose the longest loan period with the type of equal installments! Why? Well, they are lower in the first years of paying the mortgage than decreasing installments.
A short guide – what are the most important differences?
The essence of the decreasing installment, as the name suggests, is the repayment of ever lower installments. In this case – the capital part is unchanged throughout the loan period, whereas the interest portion gradually decreases. Why is this happening? This is due to the fact that the desired banks charge interest on the diminishing commitment, which remains outstanding. As a result – after a few or a dozen or so years, the level of the decreasing installment equals the equal installment, and in the next period is considerably lower.
The total cost of the loan is lower when selecting decreasing installments!
In turn, in the selection of equal or annuity installments, the interest, and capital parts are spread differently. In the initial period of repayment, interest arises – and the sum of the loan itself is much slower. Thanks to this, at the beginning of the loan, the first installments are a dozen or so percent lower than the decreasing installment. However, in summary, the general costs of the mortgage are much higher here! Importantly, the annuitant installment is of equal value throughout the entire loan period.
Which type to choose?
The answer to this question is not as unambiguous as it may seem … It all depends on the financial possibilities and expectations of the potential borrower. If we want a cheaper cost of the general loan, it is worth choosing decreasing installments. However, is this an excellent option for young people or in their prime? Not necessarily. In the case of such people, a much better move is to choose equal installments.
Declining installments effectively reduce the creditworthiness rating at the very beginning of applying for a loan. In addition, in the first period the borrower must allocate for this purpose a larger amount from the household budget than in the selection of equal installments. And this, if taking into account biasing benefits will be difficult to wade – despite total overall benefits. In addition, installment equal is a simpler way to account for it in personal finances. You can easily set a fixed order for a fixed amount and do not worry if it will increase in the next period. It is simply known what to expect, every month. And it is certainly a priceless convenience!
YES – equal installment because:
- A lower installment of liabilities in the initial phase of the loan – thanks to this mortgage can incur even persons with low creditworthiness,
- You can be sure that the change in the number of installments will not be felt, as in the selection of decreasing installments – only small fractions between the capital and interest part will change. At the beginning of repayment of the obligation – the majority of installments generalize interest. After a few years, interest and capital are regulated in equal parts, and at the end of the period, almost the same capital is repaid!
- A more reliable form of commitment that facilitates the management of the home budget – especially for people who do not have savings and extra cash in the event of unplanned expenses,
- It guarantees a better sense of comfort and safety,
- At the start, it provides a higher credit rating than declining installments
YES – decreasing installment, because:
- The longer the loan period and the higher the interest rate, the greater the savings – without taking into account additional costs, such as insurance, margin or commission,
- The balance of the total debt is quickly reduced – however, the price for it is higher in the initial stage of installment of the loan, which effectively reduces the creditworthiness of the client,
- It works perfectly in case of a commitment for a higher amount
Keep in mind also that the decreasing installment is more susceptible to WIBOR fluctuations – especially in the initial loan repayment period. And as a result, its interest rate is variable, which can be painful for family finances, which will be exposed to higher monthly installments costs.
Equal and decreasing installments and interest rate fluctuations
In practice, equal installments enjoy unflagging popularity and popularity. Practically – no loans or cash loans are repaid in decreasing installments. This choice, however, applies to mortgage loans. It is quite a difficult decision, which requires estimating future benefits. Choose a lower installment for start with higher total costs, or maybe a higher one at the beginning, which reduces the creditworthiness, but its value is quickly decreasing and the final loan costs are much lower? This is a difficult decision – but in the first and the second case you can get measurable savings. The problem is, which option is more profitable in your situation.