Home loan: What does capital grace period and deferral mean?

If you are looking to save on the monthly installments of your housing credit, the credit intermediaries of Savings in Minute can help you with the available options. Grace period and capital deferment are two ways you can choose from: find out how they work next.

Two short-term savings solutions in mortgage credit.

For those in need of short-term savings with their home loan, there are several solutions that can help. Such as grace period and capital deferment. Both allow reducing the amount you pay for the monthly installment in the initial period.  

What can bring advantages if renegotiating conditions due to being in a more financially sensitive situation. This is because these are two solutions that are currently not available for new financing. Only to be considered for customers with financial vulnerabilities in the face of rising interest rates and difficulties in paying installments.

However, in the long run, these options also bring disadvantages. So, let's see how they work.  

Lack of capital means paying only interest initially.

The lack of capital means that, during a grace period, only the interest associated with the mortgage is paid in the monthly installment. In other words, during this period, the outstanding loan amount is not paid.

As a rule, a housing credit installment consists of the outstanding amount plus the associated interest. Therefore, during the capital grace period, you only have to pay the lower amount (interest).

The period can vary from bank to bank, ranging from six to 24 months. Therefore, during this time, the amount you pay for the housing loan is lower. However, after the grace period, the monthly installment will be higher than in a housing loan that did not have a capital grace period.

Let's consider an example: in a 35-year loan, choosing a 12-month capital grace period means that the actual debt will be paid off in 34 years, as for one year you only pay interest. This means that after the 12 months, the monthly installment will be higher.

Note also that the interest rate will also be higher, because during the period in which you will repay the loan, the interest is applied to the total amount. Therefore, the total cost of credit will be higher compared to a credit without capital deferment.

Capital deferral "pushes" part of the loan to the end.

The deferral of capital is another option to relieve the monthly installment of the home loan, which means "pushing" part of the loan to the end of the contract.

This means that part of the outstanding balance is left to be repaid in the last installment of the loan. Typically, this part corresponds to 30% of the total mortgage amount.

Exemplifying, if the loan you requested from the bank was 200,000 euros with a capital deferment equivalent to 30%, it means that in the last installment of the credit, you will pay 60,000 euros. This will naturally reduce the amount of the monthly installments of the credit for the remaining repayment term.

However, you must ensure that you actually have the deferred amount to settle in the last installment of the contract. Even though the monthly installments get lower over the repayment term, the cost left for the last installment can be high and may even require taking out a new loan to settle it.

The portion of capital paid in each installment will be lower in this option: for example, if the loan is 200,000 euros, you only pay installments related to 140,000 euros of capital. But make sure you will be able to cover the remaining 60,000 euros in the end.

In addition, by amortizing less capital of the loan during the repayment term, the interest amount will be higher since it applies to the total capital (including the last installment).

Need help to move forward with any of these processes? Contact Poupança no Minuto for a free, fast, and personalized service. Credit intermediaries will quickly handle your process to renegotiate conditions and start saving with your mortgage credit as soon as possible.