Recommendation points
Most often, mortgages are issued for a period of 15-20 years (these lending terms remain the most popular in Russia), the maximum lending terms in our country are 30-50 years (however, not all banks are ready to take the risk and provide a mortgage for such a long period ).
The majority of Russians, who still remember the speeches and protests of defrauded real estate investors, consider it too risky to pay by installments for housing in an unfinished house.
Payment by installments from the developer usually implies short periods – most often 1 year, sometimes 3-5 years, the maximum period for which the installment plan is provided is 10 years. Most developers, when providing installments for housing in an unfinished house, are guided by the deadlines for the delivery of the house, so that by drawing up an installment purchase agreement at the initial stage of construction, the buyer receives a deferred payment for a longer period and more favorable terms of purchase. And yet, despite the obvious benefits of buying an apartment in an unfinished building, most Russians, who still have fresh memories of the speeches and protests of defrauded real estate investors, consider this option too risky..
The third difference
When applying for a loan to buy an apartment in a bank, the buyer can choose any of the new buildings in the city, it is also possible to choose an apartment for sale in the secondary real estate market. Usually, banking institutions do not make the purchase of housing in a certain residential complex a condition for granting a loan (although the option when the bank cooperates with a certain developer and lends only to the purchase of housing in new buildings belonging to this company should not be excluded).
In the case of an installment plan, the choice of a residential complex must be made in advance, and only then contact the developer for paperwork. An installment plan is provided by the developer for a specific apartment, moreover, only in the primary market.
The fourth difference
Different interest rates on installments and loans allow us to say that, in general, from an economic point of view, installments are more profitable than a mortgage. So, many developers provide an interest-free installment plan for up to 1 year, in the future, the annual installment rate may change – the longer the period, the higher the rate; based on the results of a three-year grace period, the buyer usually overpays no more than 10% of the cost of the apartment.
The rate on a mortgage loan is usually set for the entire term of the loan, in addition, the buyer pays such additional fees as payment for bank services, insurance of the loan object, opening an account, and so on. In 2011, in Russia, the rate on mortgage loans in rubles decreased markedly and averaged 12% per annum, but even at this rate, in case of obtaining a loan for 10 years, an overpayment on a mortgage can almost double the total cost of an apartment.
The fifth difference
The initial deposit in case of receiving an installment plan at the first stages of the development of this phenomenon in our country was 50-60% of the cost of housing, which significantly reduced the number of people willing to take advantage of such an offer from the developer.
Krasnova Julia. Still life with keys. 2009
Currently, the difference between the size of the down payment on mortgages and installments has decreased markedly. Depending on the banking institution and the decisions of the developer’s management, the down payment can vary from 10 to 30% of the total value of the property, both in the case of a mortgage loan and when receiving an installment plan.
Advantages and disadvantages
Having analyzed the main differences between mortgages and installments, you can highlight their attractive sides and disadvantages in order to more clearly imagine all the differences between these types of real estate purchases.
| Mortgage | |
| pros | Minuses |
| Long loan term | Tough conditions that the bank imposes on borrowers |
| Additional guarantees of the developer’s reliability arising as a result of bank checks | A large amount of overpayment (if you do not pay off the debt ahead of schedule) |
| The right to own the home passes to the buyer immediately after the house is put into operation | Availability of additional payments |
| Installment | |
| pros | Minuses |
| Fewer documents required and lower requirements for the buyer’s solvency | Short grace periods |
| Less overpayment | Possibility of choosing an apartment only in a new building of a developer providing an installment plan |
| Lower interest rates and the possibility of obtaining a short-term interest-free loan | Transfer of ownership only after payment of the last installment |
With the development of the system of buying an apartment in installments and increasing competition between developers, an increasing number of developers provide installments per square meter in their new buildings, so that buyers have a wide choice.
To date, the installment plan is still in demand by wealthy buyers and those who hope to receive large funds in the near future. Such buyers are quite satisfied with a small delay in payment – for 6-18 months, during which they can leisurely engage in the sale of another property, free up funds employed in business, wait for the expiration of the term of the bank deposit, and so on..
For most Russians, a mortgage looks more attractive precisely because of the long term of the loan and the decrease in this connection in monthly payments. Such buyers understand that they will overpay a very tangible amount for a new apartment, but they do not see any other way, since they simply “cannot afford” payments by installments..
What are the key distinctions between mortgages and installments? Are mortgages specific to real estate purchases while installments are used for other types of purchases? How do the repayment terms and interest rates differ between the two? Can you provide examples to help clarify their differences?