Loans

What is an Annuity Loan?

What is an annuity loan

An annuity loan involves paying the same monthly amount throughout the loan period. Learn more about how it works, about the pros and cons, and if it’s something for you.

In connection with the purchase of housing, there are several decisive decisions to be made. There are several thousand crowns to save, but you have to be read to be able to take advantage of the opportunities and choose the right one.

Fixed monthly amount

With an annuity loan, unlike other types of loans, you always pay the same monthly amount. The fixed sum includes both the amortization, i.e. the installment on the loan itself, and the interest expenses of the loan.

This means that at the beginning of the loan period you will pay more interest, while only a small part of the monthly amount is made up of loan installment. As the loan is paid off, the interest rate becomes lower, while the installment amount increases. If the interest rate rises, the amortization amount will be automatically reduced to compensate for the rise in interest and maintain the fixed monthly amount. This means that the loan period is extended instead of increasing the monthly amount. In this way, the monthly amount is fixed on the same amount throughout the entire loan period.

The advantage of annuity loans

The alternative to an annuity loan is a so-called ”straight loan”, where you amortize the same amount every month throughout the loan period. Then the monthly amount will decrease as the loan is paid off, but it will be high at first. This can be exhausting for many who have already burdened the economy hard to buy a home. The advantage of an annuity loan is therefore a lower amount at the beginning and the security of having a fixed monthly amount where one does not suffer directly from a sudden rise in interest rates.

The disadvantage of annuity loans

The disadvantage of an annuity loan is that with a lower amortization at the beginning, and possibly reduced amortization in case of interest increases, you will pay more for the loan in total than you do with a straight loan. Therefore, it may pay off for those who can afford to put up with the higher monthly costs at the beginning of the loan period in order to get a lower total cost and also be able to pay off the loan faster.

About the author

Frank Ramos

Frank Ramos

Hello, I am a savings economist at GrayAction and an expert in personal finance. I hold a master's degree in economics from Stockholm University. I hope you will enjoy reading my articles on finance categories on the site.

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