"Which loan term is most appropriate for me?" is one of the most important questions when you are searching about mortgage loans.
When the rate decreases, the total reimbursement paid to the bank and interest rate falls, on the other hand it creates an increasing on the monthly installments. For example, 100,000, 0.99% interest rate monthly amount of interest paid to the bank for a loan term of 5 years was approximately 30.000TL, in 10-year term the amount rises to 64.000TL. However, in monthly installments becomes 1.430TL from 2.220TL. It means that getting a short term loan is usually more profitable.
However, it varies from bank to bank and customer to customer, banks demand that the credit installment of the customer shouldn’t pass 40-50% of his income. This forced the people with low monthly income is more reason to take a long maturity loans. The most important factor in this system is balancing the ability to pay of the person, the value of the house and the maturity of credit. When the purchase value of the house (and subject to the loan amount) increases it also needs to increase loan term. (Person’s income is constant, and that income is a requirement to allocate a certain proportion of the installments).
Another important factor in these calculations is the interest rate. The effect of interest rates still high in Turkey compared to developed countries, therefore 6-10 years loan terms create the 53% of mortgage loans which have been used in Turkey.[1]. In developed countries low interest rates increase the average maturity of housing loans, such as 20-30 years, so the concept of paying rent to own home becomes real with loans. In America and Europe, people do not hesitate to get their dream home by using long-term loans with low interest rate environment.
In Turkey in the last 2 years, with the effect of falling mortgage interest rates maturities while in 2009 over 10 years was 15% of the use of credit in the housing loans, in August of 2011 this rate has increased to 19%. The figures show increase maturities over 10 years, a question arises as follows:
Is it reasonable to get very long maturities?
A precise description of concrete: a person who wants to use 0.99% interest per month with 100,000 TL in 10-year term loan of a housing loan repays 1,430 TL per month to the bank. To meet this payment he needs to have an income of around 3,500 TL. However, if he chooses 20- year term instead of 10- year, monthly payments come down to 1.090TL and with approximately 2.700TL monthly income, such a loan can be used easily.
Extend the term to maturity of 20 years to pay back on the spec becomes a little unreasonable. If we continue the same example, the person paying 1.090TL a month for 20 years, 30 years to maturity pays 1.020TL month. In other words, only 70 TL per month than the mortgage margin under 10 years of keeping house, the bank pays back more than about 105,000.
Of course, in high-inflation countries such as Turkey, another important parameter in this calculation is the forward-looking inflation expectations. I will give detailed examples of dealing with this issue in the next post.
As a result, when deciding matureness of the house-loan, personal income is a very important criterion. If your income is already high, choice is yours. Whether you choose a more profitable way and with short maturities reduce the total interest payment, or if you want to lessen the budget soothe your installments for long maturities. However, for the people who are in a position to choose the long maturities due to their low-income it doesn’t seem logical getting over 20 years.
"Which loan term is most appropriate for me?" is one of the most important questions when you are searching about mortgage loans.
When the rate decreases, the total reimbursement paid to the bank and interest rate falls, on the other hand it creates an increasing on the monthly installments. For example, 100,000, 0.99% interest rate monthly amount of interest paid to the bank for a loan term of 5 years was approximately 30.000TL, in 10-year term the amount rises to 64.000TL. However, in monthly installments becomes 1.430TL from 2.220TL. It means that getting a short term loan is usually more profitable.
However, it varies from bank to bank and customer to customer, banks demand that the credit installment of the customer shouldn’t pass 40-50% of his income. This forced the people with low monthly income is more reason to take a long maturity loans. The most important factor in this system is balancing the ability to pay of the person, the value of the house and the maturity of credit. When the purchase value of the house (and subject to the loan amount) increases it also needs to increase loan term. (Person’s income is constant, and that income is a requirement to allocate a certain proportion of the installments).
Another important factor in these calculations is the interest rate. The effect of interest rates still high in Turkey compared to developed countries, therefore 6-10 years loan terms create the 53% of mortgage loans which have been used in Turkey.[1]. In developed countries low interest rates increase the average maturity of housing loans, such as 20-30 years, so the concept of paying rent to own home becomes real with loans. In America and Europe, people do not hesitate to get their dream home by using long-term loans with low interest rate environment.
In Turkey in the last 2 years, with the effect of falling mortgage interest rates maturities while in 2009 over 10 years was 15% of the use of credit in the housing loans, in August of 2011 this rate has increased to 19%. The figures show increase maturities over 10 years, a question arises as follows:
Is it reasonable to get very long maturities?
A precise description of concrete: a person who wants to use 0.99% interest per month with 100,000 TL in 10-year term loan of a housing loan repays 1,430 TL per month to the bank. To meet this payment he needs to have an income of around 3,500 TL. However, if he chooses 20- year term instead of 10- year, monthly payments come down to 1.090TL and with approximately 2.700TL monthly income, such a loan can be used easily.
Extend the term to maturity of 20 years to pay back on the spec becomes a little unreasonable. If we continue the same example, the person paying 1.090TL a month for 20 years, 30 years to maturity pays 1.020TL month. In other words, only 70 TL per month than the mortgage margin under 10 years of keeping house, the bank pays back more than about 105,000.
Of course, in high-inflation countries such as Turkey, another important parameter in this calculation is the forward-looking inflation expectations. I will give detailed examples of dealing with this issue in the next post.
As a result, when deciding matureness of the house-loan, personal income is a very important criterion. If your income is already high, choice is yours. Whether you choose a more profitable way and with short maturities reduce the total interest payment, or if you want to lessen the budget soothe your installments for long maturities. However, for the people who are in a position to choose the long maturities due to their low-income it doesn’t seem logical getting over 20 years. |
