Which is more flexible – annuity or differentiation? How to transform one into another? Early partial repayment of the mortgage loan and why it is not beneficial for us?
There are several types of mortgage loan payments, but these two options are the most popular. Interest on both forms of payments is charged virtually the same – on the remaining amount of debt. Let’s move on to decryption.
Annuity loan payments
What is an annuity? This is debt plus interest, divided into equal monthly payments. The annuity payments are structured in such a way that the lion’s share of the total amount goes first to pay off interest, and a smaller “piece of the pie” is eaten later, at the expense of the base debt. It turns out that over time, within the limits of the total amount of the obligatory monthly payment, the interest debt decreases significantly, and payments on the principal debt grow.
Differentiated loan payments
A differentiated payment scheme provides for the invariability of payments on the underlying debt over time. These payments only add payments on accrued interest. It is interest payments, with a differentiated payment option, that at first even exceed the income of the mortgage borrower! Indeed – the load is huge at first, but “the game is worth the candle” and the overpayment in this case will be significantly less than with an annuity.
Which loan repayment scheme is more profitable?
We must, nevertheless, recognize that annuity is more flexible than differentiation. Namely: the loan borrower can increase monthly payments at any time. So everything that is paid in excess of the established amount is taken into account in the reduction and repayment of the underlying debt on the mortgage. It turns out that the main debt decreases faster and, in fact, all this leads to the transformation of annuity payments into differentiated.
Basically, banks are introducing an exclusively annuity payment scheme to the masses. Of course, you can, through the above manipulations, turn the annuity into differentiated payments, but there is also a bank commission for early repayment of the debt (albeit partial). It is this commission nonsense that can absorb the savings from the process of accelerating the repayment of loan payments.
Fines for early repayment of mortgage debt vary from bank to bank. Many banks do not charge clients such a fee after several initial payments. Some banks have an official ban on early payment of loan debt during the first half of the year.
If you go to a good professional loan broker, there should be no problems at all with choosing a form of mortgage loan payments. A specialist will always be able to understand the intricacies of mortgage mechanisms and help you take the hard, but sure step on the way to your own home. Who, if not a mortgage broker, can have complete information on the latest offers from banks.