Buying a home traditionally comes with many questions about mortgage loans and also the necessary time investment in visiting many banks. In addition to the different rates that banks use, an important question is which type of home loan is preferred. We briefly discuss the accordion loan as an alternative mortgage formula.
Features accordion loan
Both a residential loan with fixed interest rates and variable interest rates can both have drawbacks. When the interest rate falls, a fixed-rate loan becomes less interesting. On the other hand, variable interest rates will become less interesting as soon as interest rates rise. With this in mind, the accordion loan has arisen.
An accordion loan must in principle combine the advantages of variable borrowing and fixed borrowing. With an accordion loan , the monthly repayment amount will remain the same and a variable interest rate will be applied, but the duration of the loan will be played.
In other words, the term of the loan can be reduced or extended, such as an accordion. Usually an extension of the term is limited to a maximum of 5 years, but the total term of 35 years may not be exceeded.
The advantages of an accordion loan can therefore be summarized as follows:
- Variable interest: taking advantage of interest rate falls, and receiving a lower interest rate from the bank (the variable interest rate will be used here and is usually lower than the fixed interest rate);
- Fixed monthly amount: the monthly repayments do not change, so there is no risk that the monthly amount will rise after an interest rate review;
- Duration: The duration is extended by a maximum of 5 years. With a simulation it can still be calculated whether an accordion loan will be more advantageous than another lending formula.
Also disadvantages with an accordion loan
Although an accordion credit has many advantages and is quite flexible, there are also a number of drawbacks . In a comparison between revolving credits and a personal loan , it quickly becomes clear that flexibility is often accompanied by a cost price.
All matters and scenarios are in principle contractually determined , so it is necessary to fully understand all the points in the contract in order to assess the risk. For example, it is usually stipulated that the term of the loan is limited to a maximum of 5 years, but what if 5 years is not enough to repay everything in time?
In case five years is not enough, different scenarios can play:
- The bank agrees, accepts the risk and does not change anything: in other words, your monthly reimbursement remains the same. This is the most favorable scenario;
- The bank will request that you repay the remaining balance in one go. Taking into account that you have already paid 5 extra years of extra interest, that is a very disadvantageous scenario;
- The bank asks during the life of the loan to still increase the monthly amount.
The longer the term of a loan lasts, the more expensive a loan becomes, that is also the case with mortgage loans . Depending on the scenario that the bank proposes in the contract, this may or may not be more advantageous in the long term.
Accordion loan as an alternative?
Depending on the provisions in the contract, an accordion loan can certainly be useful. However, it is a difficult credit formula to carry out simulations and compare it with other credit formulas.
It is up to you to determine whether the contract conditions are feasible, and that you can financially accept an extension of the term of the loan (or an increase of the monthly amount in case of a revision).
Let us advise you in advance on your mortgage home loan. Do you want to know if there are no other loans cheaper? Then contact the mortgage store and request an independent comparison at more than 20 banks.