How much will we pay for an additional loan year?
The Polish Financial Supervision Authority has been able to remove new housing loans for more than 90% of real estate from the market. This was possible thanks to the introduction of limits on the minimum own contribution. Financial supervision also limited the maximum repayment period for housing loans to 35 years and additionally recommended that real estate should be credited for no more than 25 years.
This is evidenced by the large share of new “mortgages” with a repayment period of 25 years – 35 years. People choosing such housing loans should be aware that they will have to pay quite a lot for each additional year of financing the apartment by the bank.
An additional loan year may cost, e.g. USD 2,100
The cost of extending the mortgage repayment period can be discussed without reference to numerical values. However, it seems that examples of specific housing loans are more suggestive.
The table below presents the results concerning just such model loans for USD 250,000, which, depending on the analysis option, have an average interest rate of 4.25% – 5.00% and a repayment period of 20 years, 25 years, 30 years or 35 years. It is worth mentioning that each sample “mortgage” has a commission paid in cash and equal installments.
The table below shows what (depending on the interest rate) are the financial effects of extending the repayment period of an example loan by 5 years. Such operation results in both an increase in the total amount of installments (i.e. the amount returned to the bank) and a decrease in the level of the monthly installment.
An example of choosing a repayment period of 30 years instead of 25 years with an interest rate of 4.5% will mean a decrease of the monthly installment by less than 9% and an increase in the sum of installments by 3.5% (USD 10,715 / USD 2,143 for an additional repayment year). It should be emphasized that the calculated increase in the sum of installments would be much larger if Good Finance experts did not take into account inflation (2.5% per annum) gradually reducing the value of money.
In relation to the data from the table above
It is also worth presenting other results regarding the loan with an interest rate of 4.5%. These results will be particularly interesting for people who care about the lowest level of monthly installments. It turns out that reducing the installment by every USD 1 results in an increase in the total sum of credit interest by:
- 58 USD with an extension of the repayment period from 20 years to 25 years
- 87 USD with the extension of the repayment period from 25 years to 30 years
- USD 122 with an extension of the repayment period from 30 years to 35 years
The above results confirm that the reduction of the installment becomes more and more expensive as the repayment period of the housing loan is extended.
A payback period of more than 25 years is not worth it
The results of the sample calculations also indicate that as the repayment period is extended, the percentage decrease in the loan installment is getting smaller (see table above). In the case of a “mortgage” with an average interest rate of 4.5%, choosing a repayment period of 25 years instead of 20 years will reduce the monthly installment by 12.1%. The corresponding reduction in the monthly payment will be only 6.6% if a person taking a model home loan chooses a repayment period of 35 years and gives up the 30-year option.
To the disadvantage of those choosing the longest loan repayment period, there is one more circumstance now. It is associated with restrictions introduced by the Polish Financial Supervision Authority.
The said institution obliged banks to take into account a repayment period not exceeding 25 years when estimating creditworthiness (even if the client chose longer credit). This restriction means that extending the loan period, e.g. from 25 years to 35 years, will not result in an increase in creditworthiness. Such a change can only result in a lower installment and an increase in the total cost of the housing loan.