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31 October 2019

What type of loan should you choose?

What's the difference between an indexed and non-indexed loan? What about equal payments and equal instalments?

Choosing the right mortgage can be challenging, especially for first-time buyers. Your own personal needs and objectives are the key to securing a mortgage to suit your circumstances. You should also explore the various types of mortgages:

You can choose an indexed or non-indexed loan
You can choose equal instalments or equal payments
You can choose a fixed rate or variable interest rate
You can choose a loan-period of up to 40 years

There is no such thing as the right answer to these questions. Circumstances change throughout a lifetime, and none of us can guess what's best at the beginning of that journey. You should simply choose what's best for you and mix and match to ensure the best possible outcome. You can divide the loan into two halves, one of which is indexed with a variable interest rate and the other non-indexed with a fixed interest rate.
Refinancing is more common than ever and could be a great option when fluctuating interest rates and inflation can affect your ability to repay what you owe. You should take the time you need to make an informed decision. A mortgage is, after all, one of the most important financial decisions you will ever make.

Indexed or non-indexed?

Indexed loans are linked to the consumer price index (inflation) and change when prices rise or fall. You initially pay less on indexed mortgages than on non-indexed loans, but asset formation is often slower, and inflation is added to the principal amount, much like interest. Payments are initially higher on non-indexed loans, and asset formation is generally faster. Interest rates on non-indexed loans are usually higher than on indexed loans, and it could be said that inflation is included in the interest rate on non-indexed loans. People often choose indexed loans when their payment ability is lower or if they want manageable monthly instalments. Non-indexed loans generally require higher monthly payments.

Equal instalments or equal payments?

When we talk about different payment types, we are referring to equal instalments or equal payments. Equal payments on a loan involve paying approximately the same amount at the end of each month, e.g. if interest rate fluctuations are minimal or fixed. Payments are, therefore, more stable when compared with equal instalments, but the principal amount is paid off at a slower rate. You initially pay more interest and less towards the principal amount, but this trend is reversed later on during the loan period. Equal payments are generally more popular than equal instalments because monthly payments are lower. However, the loan is paid off quicker with equal instalments, and monthly payments are usually higher for most of the loan period. The principal amount is paid off in the same amount and distributed evenly over the loan period. Monthly payments also decrease later on during the loan period, and the interest and principal amount decrease steadily.

A fixed rate or variable rate and loan period

A fixed interest rate guarantees that interest rates will not rise (or fall) for a specified period (usually 3- 5 years). Fixed interest rates are generally higher than variable interest rates on non-indexed loans, which means that you pay more to fix them if market interest rates fall. However, variable interest rates can rise, fall or remain stable during the loan period, based on market conditions at any given time, such as the lender's financing costs, the Central Bank's key interest rate etc. You can fix interest rates on non-indexed loans with variable interest rates via so-called terms and conditions changes, which might be the best option if interest rate fluctuations are foreseeable. You could also ensure stable payments over the next 3-5 years.

The maximum loan period for mortgage loans is generally 40 years for market lenders. However, this does not mean that you have to take a 40-year loan. You can shorten the loan period if payments are manageable and you fulfil the loan's terms and conditions. It would be best to consider your ability to take a short term loan before making a final decision. The shorter the loan period, the less interest you pay and the faster you become debt-free.

Some good advice

You can explore the options using our mortgage calculator. The calculator provides a clear picture of the various loan types and gives you a good idea of the total associated costs according to type. However, the best option is always asking one of our mortgage advisors. You can book an appointment online and take advantage of our expert advice.