Choos­ing the right mort­gage

Many of us simply lose track when looking at different types of loans

When financing real estate, for example, you need to assess whether to take an indexed or non-indexed loan, or even a combination of both that combines the advantages of each. But what is the difference between such loans?

The simplest explanation is that payments on indexed loans are lower and equity builds more slowly, while non-indexed loans have higher payments and therefore lead to faster equity building.

Indexed loans

Indexed loans carry lower interest rates, but in return, inflation increases are added to the principal. You could say you're borrowing against future inflation. This increase in principal due to inflation is then distributed across the remaining payment dates of the loan, causing future payments to increase. These loans suit those who want to keep regular payments to a minimum and avoid overextending themselves.

Non-indexed loans

Non-indexed loans carry higher interest rates, resulting in higher monthly payments. The principal doesn't increase as you could say the inflation has already been paid for. These loans suit those who want faster equity building and have the financial capacity to temporarily handle higher payments.

It's important to conduct a thorough assessment of your financial situation before making a loan decision.

Does the loan term matter?

Once you've decided whether to choose an indexed or non-indexed loan, the next step is to look at the loan term, as it can make a crucial difference in how long you'll be repaying the loan. Maximum loan terms vary, but real estate loans can extend up to 40 years.

The most obvious difference between varying loan terms is that the longer the term, the lower the payments and the slower the equity builds, as the principal repayment is spread across more payment dates. It should be noted, however, that different types of repayment methods, equal payments or equal principal payments, can affect this.

Another factor to consider when examining the loan term is the interest cost. Interest accrues on the loan, and the longer it takes to repay the loan, the higher the accumulated interest cost.

What usually determines the loan term is the borrower's ability to pay, and when examining this, it's very important to be cautious and not overextend yourself. It might be wiser to comfortably manage the payments and then make additional payments on the loan if you can, rather than taking a shorter-term loan and struggling with the payments.