As much as 18% of over 100,000 borrowers may have made the mistake of choosing a repayment system.
Poles are currently indebted for USD 265.4 billion due to loans taken out for the purchase of flats – March statistics published by the Good Finance shows. Most of these loans are repaid on the basis of equal installments. As many as 84% of borrowers choose this way of servicing their debt. According to Home Broker estimates, the decreasing installment is much less popular because it tempted 16% of debtors.
It may be surprising that in the case of a loan in the “Rodzina na Ciebie” program, the popularity of a decreasing installment is greater than in the case of a traditional loan. Under current market conditions, this solution can be lost. The effective interest rate on a preferential loan is lower than achievable investment returns. The problem may concern 18% of loans from a group of over 100,000. loans financed by the budget.
With a traditional loan, a decreasing installment means less interest
But what is the difference between decreasing installments and equal installments? The general assumption of the second of these systems is that the monthly installment will remain the same throughout the repayment period.
Due to the fact that at the beginning of the repayment interest on the loan is calculated on a large amount, the installment, which is used for the actual repayment of the borrowed capital, suffers.
For example, borrowing 300,000 USD for 30 years in your native currency you have to take into account a monthly installment of 1.7 thousand USD, of which in the first month only close to USD 330 repays borrowed capital, and the rest is interest.
On the other hand, in a decreasing installment, the amounts deposited with the bank should be lower and lower each month. In this case, borrowed capital is repaid faster – because it is repaid evenly throughout the repayment period. Borrowing 300,000 USD for 30 years in your native currency you have to reckon with the first installment decreasing at the level of 2.2 thousand USD and the last one worth around USD 840. In these amounts, USD 833 repays the borrowed capital every month, while the rest is interest.
The low popularity of the declining installment is evidenced by the fact that in the first repayment period, debts absorb more money than equal installments. In the discussed example the difference reaches 0.5 thousand. USD. Therefore, the creditworthiness with decreasing installments is lower than in equal installments. On the other hand, the undisputed advantage of decreasing installments is that less interest is paid off in total in this system.
With a loan of 300,000 USD, 30 years and an interest rate of 5.5%, 313 thousand should be donated in the form of interest USD with equal installments and 248 thousand USD with decreasing. So the difference is 65,000 USD and speaks in favor of debt using the decreasing installment.
In a family with repayment, do not hurry
Unlike traditional loans, those in the “Rodzina na Ciebie” program are co-financed by the state. Due to the fact that for 8 years the borrower receives nearly half of the interest from the state coffers, the effective interest rate on such a loan may be lower than deposits.
Instead of paying off the borrowed capital, it is more profitable to put money away in a high-interest deposit. Unlike traditional loans, therefore, the optimal solution may be equal, not decreasing installments. However, it should be remembered that in its current form the program includes the purchase of premises up to 75 sq m and houses with an area of 140 sq m, but the area is subsidized to 50 and 70 meters respectively.
So the closer to this lower limit, the greater the installment will be financed by the state. So how much could you save by choosing equal installments, not decreasing in “Family on your own”, assuming that the current market conditions would remain unchanged?
You can stay liquid and save
Under this program, in the first quarter of this year, loans were granted for an average value of USD 198.5 thousand. USD. Assuming that the borrower would like to borrow 200,000 for 30 years. USD for the purchase of a flat with an area of up to 50 sq m would have to take into account the first installment at 662.63 USD in the equal installment system and 1010.56 in the decreasing installment.
The last co-financed installment would amount to USD 726.01 in the equal installments system and USD 890.49 in the decreasing installments system. As you can see, the difference in installments decreases over time. In the case of the first payment to the bank, it amounts to nearly USD 348, and in the case of the 96 installment – i.e. the last one – USD 164.
So, if you choose equal installments and place the amounts saved on a monthly basis in a bank on a savings account with an interest rate of 4.75%, it would give you the capital of 30.7 thousand for eight years. USD. For comparison, the system of decreasing installments would pay 53.3 thousand over the entire period of receiving co-financing. USD borrowed capital, so by 28 thousand. USD is more than in the system of equal installments.