Which mortgage payment schedule to choose – annuity or linear? | Business

It is important to know that each monthly installment of the loan consists of the returned part of the borrowed amount and interest. Therefore, the terms “variable” and “fixed” are not related to the entire monthly payment, but to the monthly installment of the loan – it is either variable or fixed.

“To make it clearer for customers, it is more common to choose to call these two different loan payment methods annuity and linear, respectively,” says E. Jurevičius.

Company photo/Edvinas Jurevičius

Annuity (variable) loan repayment method

In the case of an annuity schedule, the borrower pays monthly installments of a similar amount throughout the contract period – the amount of the installment can change only by recalculating the interest. Initially, the payment consists of higher interest and lower repayment parts of the loan.

“Over time, the portion of the interest decreases, and the portion of the borrowed amount that is returned increases, but the total amount of the payment remains relatively constant and changes only when the interest is recalculated.” Such a constant payment amount is often attractive to borrowers, as it provides predictability when creating a budget,” says the expert.

For example, if the customer charges 120 thousand EUR housing loan for 30 years with 1.69 percent. margin and according to the current value of EURIBOR, according to the annuity schedule, he will pay regarding 580 euros every month, assuming that the amount of EURIBOR remains the same throughout the loan period. The total amount of interest in this case is approximately 107 thousand. euros.

“Many clients want to ease the burden of the loan and pay the smallest possible amount every month, so clients usually choose the annuity schedule, which gives them more freedom to plan their finances,” adds E. Jurevičius.

True, those who choose an annuity method of loan repayment should keep in mind that the size of the monthly payment also depends on the number of days in the month – it is slightly higher in longer months and lower in shorter months, clarifies the expert.

Linear (fixed) loan repayment method

In the case of a linear schedule, the repayable part of the borrowed amount is constant throughout the duration of the contract. The borrower pays a fixed amount of principal and interest on the balance every month.

“This means that the total amount of the premium decreases over time. Initially, the premiums are higher than in the case of an annuity schedule, but they decrease every month because the interest is calculated on the ever-decreasing balance,” explains the expert.

If 120 thousand is taken EUR housing loan for 30 years with 1.69 percent. margin and according to the current value of EURIBOR, the person who chose the linear schedule will initially pay regarding 760 euros, at the end of the contract – regarding 290 euros, assuming that the amount of EURIBOR remains the same throughout the loan period. The total amount of interest would be regarding 84 thousand. euros.

Which schedule to choose?

According to the representative of Luminor Bank, which schedule is better to choose, undoubtedly depends on the individual needs of the borrower.

“The annuity schedule is more favorable for people for whom it is important to clearly plan expenses in the current period and to be sure of the amount of the monthly payment. It also favors those with stable jobs who expect their incomes to remain relatively constant, as well as young professionals whose incomes have not yet reached their full potential and are likely to increase over time – the relative impact of monthly payments will diminish accordingly as their incomes grow.” – advises the expert.

On the other hand, according to E. Jurevičius, it is more useful to choose a linear schedule for those who can afford to pay higher installments at the beginning of the loan period, because then less interest is paid throughout the period. In addition, this schedule can be useful for those who are planning major life changes in the future that may affect their income.

“In any case, if you have questions regarding choosing a payment schedule, the bank’s specialists can provide advice. They will certainly be able to explain which option is better in a specific situation, and will provide individual consultation”, says E. Jurevičius.