When taking out a mortgage, it is important to consider how you intend to do with the mortgage repayment. The repayment is the amount you repay on the loan itself.
That is, what you pay at any time minus the interest rate, so after each repayment, the total loan decreases. You basically have three different types of amortization to choose from.
If you have a loan that is free of interest, it means that you always pay only the interest rate. Then, of course, at some point in the future you will have to repay the loan, but that is later in the future.
The advantage of an amortization-free loan is that you get less expense at every payment opportunity. The negative is instead that the loan does not fall and thus your interest costs do not fall either.
If you want to read more about positive and negative aspects of mortgage-free loans, you can do so at Private Business.
If you have an annuity loan, that means you always pay the same amount to the bank. As a result, what you pay for the first time will largely be just interest expense and some amortization. However, from the beginning, you repay a bit, which makes the loan constantly smaller and smaller. When the loan becomes smaller, the interest cost also drops, which means that you will repay more and more of the loan over time.
If you want to get an overview of what it would cost with an annuity loan, you can use our annuity loan calculator.
If you choose to have straight amortization, it means that you always pay a certain amount to the bank that goes to amortization. Then, in addition to that, you pay an interest cost also with each payment. What is a bit nice about this type of repayment is that as the loan falls, the payments to the bank are constantly getting smaller and smaller.
After all, it is true that the interest rate becomes smaller after each time you have paid off. If you have a loan with straight amortization, you can change the rate at which you amortize, so if you want to both increase or decrease the rate in the meantime, you can do well.
Amortization period for a mortgage loan
The repayment period can vary greatly on a loan. Time is really governed by two different things. First, the bank what the bank wants. Partly what rules they have regarding how long you have to pay back a loan, but also at what speed they feel you can manage to repay the loan at.
The other thing that governs is what you want yourself. You can choose how long you want to spend within the limits set by the bank.
The mortgage in your home loan is a loan that you do not need to rush to pay back. The repayment period on a mortgage loan can even be as long as 50 years at some banks. For the top loan, a shorter repayment period applies, which is usually somewhere between 10 and 20 years.
What to choose?
You have to think about what your financial situation looks like. What you can say is that a longer repayment period means that you will have to pay less each month but that the total cost of the loan will be more expensive as you will have to pay more interest as the loan will be longer. If you pay back quickly instead it will be higher cost every month but overall cheaper.
We have written more about this in our article Fixed or variable interest rates.