Everyone who takes a loan would like to pay as little as possible. However, not always a lower installment means cheaper credit.
If the reduction in monthly costs is not due to a lower interest rate, but the extension of the period is despite ad hoc benefits, the whole loan can cost us much more. A 10-year loan period means an increase in costs by up to 50%!
Borrowing a home loan
When borrowing a home loan, every borrower faces the dilemma of how long to pay back the debt. On the one hand, we want to pay back the loan as soon as possible, so that it generates the least interest and "get rid of the trouble", but on the other - we are limited by our payment options.
The loan installment and other monthly payments must be tailored to our income.
For this reason, the loan period often depends on our income level and creditworthiness. Even if we would like to repay the loan for e.g. 15 years, the bank may extend the repayment period in the analysis process, because in the analyst's opinion only a longer loan period (lower installment) will allow for timely payment of installments.
On the other hand, even if we apply for a loan for 30 or 40 years - banks are obliged to calculate their creditworthiness for a shorter repayment period.
According to the Recommendation SII of the Polish Financial Supervision Authority, banks must assume that the loan will be repaid within 25 years, even if the loan itself is granted for a long time. In other words, extending the repayment period by more than 25 years will only lower the installment, but will no longer increase the available amount.
However, is it worth extending the repayment period to 40 years if we do not receive benefits in the form of a higher loan amount? A lower installment means higher costs! The longer we repay the loan, the more interest we have to pay to the bank.
However, extending the repayment period by more than 25 years means that the loan installment decreases relatively slightly, but the interest cost increases disproportionately high.
Depending on the interest rate on the loan, these differences change. For loans with an interest rate of 7%, thanks to the extension of the repayment period by 10 years, the loan installment is reduced by almost 10%. However, over the entire loan period, the interest cost increases by over 50%.
Benefits on the installment
We get greater benefits on the installment, with a lower cost of extending the repayment period when the interest rate on the loan is lower.
It is true that today the interest rate on PLN loans significantly exceeds 5%, but in the perspective of a dozen or so or several dozen years, we cannot exclude that the interest rate will drop or increase now unreal levels.
By extending the loan repayment period at an interest rate of 3%, the installment decreases by more than 18%, but the interest cost also increases significantly, by more than 45%. Therefore, regardless of the interest rate, a longer repayment period always means higher - and disproportionately - costs.
Since January 2012, extending the loan period by more than 25 years gives only a lower installment, but does not increase the creditworthiness. As the latest data from the Polish Bank Association show, this also changed the clients' approach to the repayment period of loans taken out.
In the second quarter of 2012, when the provisions of the SII Recommendation had a full impact on the market, the share of loans with a repayment period of over 35 years significantly decreased, as it amounted to only 1.81%. For comparison, in previous quarters - it was several times higher and reached levels exceeding even 9%.
This may mean that many customers decided to shorten the repayment period, as taking longer loans reduced the installment only to a small extent, generating significantly higher costs.
At the same time, these changes indicate that the part of customers that until now had creditworthiness only for 35 years and more, in 2012 did not decide to take out a loan at all.
Although the extension of the repayment period does not increase the creditworthiness of many banks, it is still possible to obtain a loan with a long repayment period of up to 40 years.
Although it is only possible to get a loan for 50 years at Fine Bank, people who want to repay the loan for more than 30 years despite higher costs should not have a problem finding a bank with a long repayment period.
You should undoubtedly have to adapt the loan period to your needs and possibilities
When taking out a loan, you should undoubtedly have to adapt the loan period to your needs and possibilities. The extension of the repayment period results in the necessity to pay higher interest but gives the immediate benefit of reducing the monthly installment.
However, the repayment period of over 35 years causes a drastic increase in costs, with a simultaneous almost imperceptible reduction in the monthly installment.