First, a few words about home loan interest rates. The total home loan interest rate is comprised of a reference interest rate and a margin (markup). There are several different reference rate options, of which the 12-month Euribor is very common. Together, the reference rate and margin make up a loan’s total interest rate.
Variable annuity
With the variable annuity method, your home loan instalments remain the same until the reference interest rate changes. The proportions of a repayment of the loan principal and interest in an instalment change as the reference rate changes. The loan term remains the same.
For example, if a loan’s reference rate is the 12-month Euribor, the loan’s reference rate is adjusted once a year. As a result, also your payment amount may increase or decrease.
- Loan term remains the same
- Payment amount changes when the reference rate changes
Equal payment
In the case of equal payment, you repay your home loan in equal instalments. The instalment remains the same when the reference interest rate changes, but the loan term changes. A rise in the reference rate lengthens the loan term whereas a fall shortens it.
- Loan term changes
- Payment amount remains the same
Equal amortisation
Equal amortisation means amortising the loan principal with the same amount in every instalment, but the interest added to the amortisation varies. That is why changes in the reference interest rate affect the payment amount.
Equal amortisation is initially burdensome when the principal is at its largest. As the principal decreases with each repayment, also the proportion of interest in the instalment decreases, and so does the payment amount.
- Loan term remains the same
- Payment amount changes when the reference rate changes
- Loan is amortised by an equal amount with each instalment
Lump-sum payment
The loan principal of a single-payment loan is repaid on a one-off basis. Only interest on the loan is paid during the loan term. This loan is mainly suitable as “temporary financing” in situations where a new home is bought before the old one is sold, for example. Sometimes, the single-payment loan is referred to as a bullet loan.
Every loan is case-specific
Note that all repayment methods are not available for all loans. This is affected by the bank’s range of loan products, among other things. Each loan application is unique and will be processed on a case-by-case basis.
Living with a home loan
Which one is better: variable annuity or equal amortisation? Or fixed equal payment? There is no simple answer to this, as each loan application is unique. What can be said is that you should pace and match the repayment of a home loan with your personal finances in a way that fits your life situation. Our loan specialists are here for you so that you don’t need to think about these things alone.
- In the loan negotiation, discuss with the OP loan specialist which loan repayment would suit your situation best.
- You can think about the size of instalment that would suit your financial situation already before the loan negotiation.
- You can select any day of month as the loan payment date. Often our loan customers select as payment date the date on which salary, wages or other regular income is paid to their account.
A typical home loan repayment scheme spans about 20 years. Anything unexpected can happen during a long loan term. Typical situations in which you may wish to change your loan repayment scheme include a change in salary or going on a study or parental leave.
You can apply for a change in your loan repayment terms if the repayment scheme you have agreed with your bank does not fit your present life situation for some reason. It is possible to make an extra loan repayment by yourself on the op.fi service or OP-mobile.
The home loan is granted by an OP cooperative bank.