When taking out a home loan, you need to decide whether to choose an annuity or a schedule with equal principal payments as a payment schedule. This determines both the size of the monthly loan payments and the total amount the borrower will pay in interest. The head of home lending at Coop Pank, Karin Osipova, explained how to make a choice. The more popular option is the annuity payment schedule, and there is a very simple reason for this: monthly payments in this case are much lower. This means, on the one hand, that the impact of payments on the monthly budget is less, and on the other hand, that with the same income you can take out a larger loan and thereby afford housing of a larger area or of better quality. With an annuity schedule, loan payments remain the same during the periods between Euribor fixations. In most cases, the annuity schedule uses a 6-month Euribor rate, meaning the loan payment amount is always the same for 6 consecutive months. This increases confidence and allows you to better plan your family budget and expenses. Since in the case of an annuity schedule the borrower's monthly expenses are lower, and banks take this into account when assessing solvency, a home buyer can, if necessary, apply for a slightly larger loan amount. This is especially important for young people who have not had the opportunity to save money for a long time so that after making self-financing, they would still have money left to equip their new home. If your priority is not to keep monthly payments as low as to pay less interest over the life of the loan, you may want to consider a schedule with equal principal payments. At the same time, monthly payments in the first half of loan repayment are significantly higher than with the annuity schedule. However, the loan balance decreases faster because the principal makes up a larger monthly payment than with an annuity schedule. An equal principal payment schedule means that the principal portion of the loan is divided into equal payments over the life of the loan, plus interest accrued on the loan balance. With this schedule, the first monthly payment is the largest, but the amount of payments decreases every month. Equal principal payments may be considered primarily if your monthly income allows you to easily pay more. The advantage of paying in equal principal installments manifests itself, for example, in a situation where there is a desire to change housing, since by the time of sale the loan has been repaid to a greater extent than in the case of an annuity schedule. If there is a need for a credit holiday, during such a holiday the interest payments will also be lower due to the lower loan balance. For example, if you take out a loan of 100,000 euros for a period of 30 years and the interest rate including Euribor is 5.65%, the monthly payment under the annuity schedule will be 579 euros. The total amount of interest for the entire loan period will be 108,700 euros. In the case of a schedule with equal main payments, the first and largest payment will be 760 euros, and subsequently the amount will gradually decrease. The total amount of interest during the loan period will be 85,500 euros. The difference is also clearly visible when comparing the loan balance five years after receiving it. If in the case of an annuity schedule the loan balance by that time will be about 92,000 euros, then in the case of a schedule with equal basic payments it will be 83,000 euros. It should be taken into account that if the interest rate decreases, the difference may become smaller. If a loan of 100,000 euros is taken out for 30 years with an interest rate of 4.3%, including Euribor, then in the case of an annuity schedule the monthly payment will be 498 euros and the total interest amount will be 79,570 euros. In the case of a schedule with equal principal payments, the first and largest payment will be 648 euros, and the total amount of interest will be 65,628. In other words, the lower the interest rate, the less the borrower will benefit from using a schedule with equal principal payments, although in any case the costs for percentages will generally be lower. When concluding a home loan agreement, the applicant can choose whether he prefers a schedule with equal principal payments or an annuity schedule – there are no additional costs. However, if the loan has been repaid on a schedule with equal principal payments for several years and, in conditions of high Euribor, the monthly loan payments have become too high, you can consider switching to an annuity schedule to reduce the size of the monthly payment. If you change the schedule type, the usual fee for changing the loan agreement will apply. In most cases, Coop Pank home loan clients prefer an annuity schedule, which offers a lower monthly payment and a larger possible loan amount. Because buying a home involves a number of costs up front—from appraisals and notary services to furnishings—an annuity schedule can help keep costs down. However, if income allows, the borrower should definitely consider the option of a schedule with equal principal payments. It is also worth taking into account the depreciation of money during inflation and consider whether, when choosing an annuity payment schedule, it is worth using the released funds, for example, for regular contributions to the third pension pillar or using some other investment solution that generates interest income.
