When looking for a home loan to suit you, you need to decide over how many years you want to pay it off. But how do you go about choosing the most convenient term for you?
You decide the term
There is no ideal term. For a mortgage loan, however, the average term is between 10 and 30 years. You should decide the term based on a series of criteria.
The term is linked to your age. For instance, you might choose a term of 15 years because your children will be moving into student digs by the time the loan is paid off and you want to be free of repayments at that stage.
When you apply for a mortgage loan, our Home Expert will look at your financial situation. He or she will then provide you with more information on the term based on your monthly income, so you have financial peace of mind when paying off your home.
Interest and the selected repayment option
The term is also closely linked to the interest rate. Each repayment includes part of the principal and some interest. The proportion of each depends on the selected method of repayment.
1. Loans with principal repayments
The most popular repayment method involves equal monthly repayments. You pay some principal and some interest each month. In the early years, you will pay more interest than principal, but by the end of the term, the opposite will be the case. However, you always pay the same monthly amount throughout the term of the loan.
Another method involves decreasing repayments. In this case, you repay the same amount of principal each month, together with interest on the outstanding amount. Since the amount to be repaid decreases each month, the interest to be paid does as well. As a result, you pay less and less (hence the term 'decreasing').
2. Interest-only mortgage loan (bullet loan)
This is ideal if you want to borrow a substantial amount of money for a short period of time. You do not have to repay any of the principal during the term of the loan, as long as it is repaid in full on the date agreed with your bank. However, you still have to pay interest on the full amount during the term. This set-up is common for bridging loans. It can be useful, for instance, if you are unable to finance the construction of a new home because you have not yet sold your current home.
3. Other options
There are many more options, and combinations of methods are possible, too. Feel free to call or chat with one of our Home Experts at KBC Live. He or she will draw up a customised repayment schedule with a term that suits you.
If you opt for a mortgage loan, you qualify for tax benefits. Each year, you can claim back tax on the interest, principal repayments and certain premiums you pay in relation to your loan, over its entire term.
How to choose
Work out your monthly income and expenditure. Try to estimate how well a shorter term would suit your budget. You can calculate this accurately by simulating your mortgage loan. Your Home Expert will also be happy to help you make a well-informed decision.