If you are applying for a home loan with a bank, it is very likely that it is for a depreciable loan.
This type of borrowing is simply the most commonly practiced by the acquirers: the borrowed capital is stretched over time, throughout the duration of the credit. Let’s take a closer look at what the depreciable mortgage is and what its benefits are.
Real estate loan depreciable: what are we talking about?
Schematically, there are two major types of loans to buy real estate. On the one hand, the credit settled all of a block at the end of the contract (what is called the loan “in fine”). On the other hand, the one that is repaid over time, slowly but surely: it is the depreciable mortgage.
“Amortizable” means that the principal borrowed initially is amortized according to the monthly installments paid to the lending institution until the full amount due is repaid. From the moment the funds are paid to you, you start to pay back a certain amount of money set in advance for a period that can range from (usually) 5 years to 25 years. Even more if affinities (loans over 30 years are no longer rare).
What are the monthly payments of the amortizable loan?
Unlike the “in-fine” credit, whose monthly payments concern only loan interest and insurance costs, the monthly payments of the depreciable property loan are made up of:
• part of the capital;
• Loan interest;
• The cost of borrower insurance.
The monthly payments are constant in most cases, and calculated according to your borrowing capacity. Unless your situation changes (professional change, sudden return of money, non-working time, accident of life …) or renegotiation of the credit rate, you repay the same amount from the first to the last month. What changes is the balance between capital and interest.
It is precisely the particularity of the depreciable property loan: the interest is calculated on the outstanding capital. As time passes, the share of capital is important. Then, as time goes by, interest decreases in favor of the amortization of capital. Which means one thing: in the early days, you repay a lot of interest (more than half of the monthly payment). It is only over the years that the priority is reversed.
For example, on a maturity of 1,000 euros, you repay 700 euros of interest and only 300 euros of capital. After fifteen years, the share of interest is lower (200 euros) and the share of higher capital (800 euros), etc. Until there is almost nothing but capital and almost no interest.
What are the advantages of the depreciable mortgage?
If you choose a fixed rate, you can take out a loan knowing exactly how much the transaction will cost you. This is the main advantage of the depreciable property loan: which says pre-defined amount, says identical monthly payments throughout the contract.
Of course, it is possible to opt for a variable rate rather than a fixed rate. Depending on the rate changes, your monthly payments and / or your borrowing period may go up or down. It can be a benefit … or a big risk!
Another advantage of the mortgage loan: your monthly payments are potentially flexible. They may have to vary to reflect the evolution of your financial situation, within the limits of ceilings set upstream. If you benefit from a salary increase, increasing your monthly payments will allow you to mechanically reduce your borrowing time – and vice versa. According to the banks, the modulation of monthly payments is allowed on the anniversary date of the mortgages … or at any time!
But beware: in the context of a mortgage repayable loan, too much borrowing time leads you to pay a lot of interest at the end of the race. It is therefore necessary to calculate carefully not to pay a too high monthly payment while limiting the overall duration of the credit.