The loan period is very often omitted as a parameter that should be considered when choosing a mortgage. All borrowers are interested in margin, commission, fees for early repayment or additional products. Yes, all this is important, but from the borrower’s point of view the most important parameter is the loan period.
Loan period and loan repayment rate
In the table below I wanted to present the relationship between the amount of capital in installments depending on the loan period.
The loan repayment period affects not only the amount of interest, but also the capital content in the initial installment. The relationship is very simple: the shorter the loan period, the higher the capital content. Higher capital from the very beginning of the loan means faster repayment of capital and finally lower interest.
Early repayment as an alternative
Recurring loan overpayments can be a good solution for people who attach great importance to creditworthiness or for those who are afraid to take out a loan for a shorter loan period due to a significant burden on their household budget. Loan overpayment means overpayment of capital and generally brings similar benefits as a shorter loan period. The condition is regularity from the very beginning of loan repayment.
An overpayment is profitable, even if it involves a commission for early repayment. Everything should be carefully calculated in relation to individual parameters, but for most borrowers the benefits of overpayment will be greater than commission losses. Overpaying the loan requires internal discipline. Being a mortgage holder myself, I know that it is relatively difficult due to the fact that there will always be some unexpected expenses in life.
The loan period is one of the most important, but also one of the least appreciated, mortgage threads. Mathematically, it is the main generator of the cost of credit. Theoretically, a short period of 5 years “in or out” means that your costs change by tens of thousands. From my perspective, the loan period should be chosen so as to combine the installment at an acceptable level with a reasonable level of interest costs.
Isn’t that easy? Even if in the initial stage of the loan you took out a loan for 25/30 / God forbid 35 years, try to change it over time. Shortening the period, overpayment of at least some will speed up the mortgage repayment rate. It will be cheaper and easier at heart.