What is the residual value in home loans?
When we buy financial products, namely credits, we must take into account all the peculiarities that come with their acquisition. From interest rates to terms and forms of payment, all the small print on your contract is important.
Thus, we intend to approach a specific modality of payment of monthly payments: the residual value. By requesting the use of the residual value in your mortgage, you will be able to pay lower monthly payments to the bank concerned.
Let’s look at an example. Carol and Niguel are a 25-year-old couple who want to buy their first home in Peniche so they can live together and raise a family. They are thinking of buying a T3 and the price of this apartment is 120 thousand dollars.
When comparing the various home loans and choosing the one that suits them, they contacted the bank to formalize the contract. Since the young couple have a family income of $ 2,000 and will have some extra expenses in the first months of home buying – namely furniture, gas, electricity and water contracts, among others – they want to be able to pay less for monthly installments.
What is residual value?
Carol and Niguel questioned the bank about payment arrangements. They were informed that there are three forms of payment, each with its own characteristics and advantages: the couple can pay in constant installments, can have access to a shortage capital, and can still enjoy the residual value.
The young couple opted for the residual value. Residual value – also known as deferral capital – is a form of payment that banks usually make available to consumers so that they can pay a lower monthly installment over their loan.
Depending on the bank from which the loan is requested, the residual value may be up to 30% of the credit. This means that up to 30% of your loan amount can be paid back only at the end of the repayment period, thus easing the monthly payments you have to pay to the bank and thus smoothing out the monthly budget.
With funding from $ 96,000 (since the bank only finances 80% of the property value), the Carol and Niguel would have to pay the financial institution chose to get credit for 30 years with an APR (Effective Annual Rate) of 2,339% and a variable rate indexed to 12-month EURIBOR, a monthly income of approximately 290 dollars.
This financing would have a residual value of 30%, and the last installment would have a value of approximately 29 thousand dollars and the total amount charged to the consumer would be 142,109.25 dollars.
If the couple had opted for the same loan, but with constant installments and no residual value, with the same APR, the same variable rate and the same contract duration, the monthly amount to be paid to the bank would be approximately 350 dollars and the Total amount of funding would be $ 132,727.95.
With a residual value of 30%, Carol and Niguel would save about 60 dollars per month in installments. But at the end of the contract they would pay another 9,381.30 dollars.
Whether or not to take advantage of residual value?
What happens is that, without using the residual value, the installments are always constant throughout the contract, initially paying more interest and less funded capital, and this trend changes until, in the last installment. , you will have to pay more capital and less interest.
With the use of residual value, monthly installments are reduced except for the last monthly payment which includes the amount of residual value. In this case, the interest rates are much higher at the beginning of the payment of the monthly payments and the capital is lower and although this trend is changing, it is not as sharp as without using the residual value.
In general, if we do the math, the interest amount will be higher if the residual value is chosen and the total amount of the financing will be higher.
Type of financing payment
- Individuals who need to buy a home and buy a home loan but are unable to pay the normal monthly amount for the financed loan. In this way, they choose the residual value and spend less money at the end of the month to pay the installments to the bank;
- Mortgage for houses under construction, where consumers are still living on another property and have many other expenses. They thus prefer to reduce the monthly payment at the beginning of the contract.
When purchasing the best financing for your needs, you should contact the bank in question and find out not only what residual value you may have, but also how much and how much your last monthly installment will be in order to understand if financially viable for you to opt for this solution.