When a mortgage is generally opened, there are two elements that are considered by the applicant: the amount disbursed and the installment :
– the amount paid is the amount of money we need to carry out our project, whether it is the purchase, construction or renovation of a building;
– the installment gives us the measure of how much we will have to pay (generally monthly) to be able to honor the contractual commitments. The amount of the installment is therefore generally very important because it will be decisive for the standard of living that can be afforded in the years of duration of the financing we have requested.
The elements that impact on the installment amount are the following:
- the amount paid ;
- the duration ;
- the interest rate ;
- the frequency of the installment.
So let’s see them in detail.
The amount disbursed
The amount disbursed is obviously a determining element for the entity of the installment that we will have to pay.
Other factors being equal (interest rate and duration) it is clear that a higher amount of the loan will result in a higher installment and vice versa. But there is another strong link between installment and loan amount: in fact the maximum sum that the bank will decide to finance depends on the amount of the resulting installment, which must necessarily be compatible with the income of the applicant.
The duration of the loan can also have an impact on the amount of the installment, as is obvious. If we want to avoid having a burdensome commitment for too long, we will have to be available to have a larger payment to pay. This will reduce the risk we will expose ourselves, especially in the case of a pure variable rate mortgage. However, we will need to be sure that we can afford a higher rate with our income.
The interest rate
The interest rate can also have its impact on the installment: a higher rate will lead to a higher rate and vice versa. But there is also another aspect that is important to emphasize, namely that the type of rate, ultimately, is that which ensures that the amount of the installment is constant or can vary over time.
In the case of a fixed rate, in fact, the installment will be constant over time, and this will give us the security of an amount to be paid that will not be subject to market fluctuations. Be careful, however, that this guarantee generally has a price, ie the interest rate, at least at the outset, will be higher than in the case of a variable rate.
If we chose a variable rate mortgage, on the other hand, we would be subject to fluctuations in the installment which could also be significant (for example, in the absence of a CAP, ie a maximum limit to the interest rate). The risk that we are going to take can be particularly high in the case of very long duration of the chosen loan.
The frequency of the installment
Generally when we think of the mortgage payment, we imagine it as a monthly commitment to support, and in fact, it is often what happens in most mortgages. But the installment may also have different intervals (for example, half-yearly). It is clear that this can have an impact on the installment amount.
We have seen how the installment can be constant, in the case in which a fixed interest rate is applied, or subject to fluctuations in the event that one has opted for a variable rate mortgage, or mixed. But the installment may, over the duration of the loan, very also for another reason: the partial extinction of the loan.
In fact, as is known, in general, it is possible to extinguish the loan in advance, either completely or partially. If in the first case the result is obviously the definitive cessation of the commitment to pay an installment, in the second case generally there is a reduction of the same.
The extent of this reduction depends on the policies applied by the bank: it may be a percentage reduction corresponding to the portion of the residual capital repaid in advance, or it may lead to a reduction in the duration which, by virtue of the lower interest to be paid, will have the effect induced in any case an installment reduction.
The advice of Mister Banko
The amount of the installment is not only important because it gives you the measure of your commitment to repay the amount paid by the bank: remember that the requested sum will be financed only if you can prove that the resulting installment is consistent with your income. Consider this aspect well, you may find yourself in the position of having to provide additional guarantees or extend the duration of the loan.
Finally, don’t limit yourself to considering the starting rate of the loan, if you choose a variable rate, consider well the risk of an increase in the same installment, especially if the duration of the loan is long.