Unfortunately most people taking a loan in Finland accept exactly the package the bank offers them. 
When it comes to the interest rate, consumers are nowadays much more educated than before. On the other hand knowledge about different ways to pay back a loan is extremely rare. People usually blindly go for what the bank suggests, and end up paying more. Here is what you need to know about loan amortization.


Equal payments – your bank’s favourite

Finnish banks by default offer an equal payment (also called annuity) scheme to home loans. As the name tells in an equal payment scheme the payments remain equal in size, at least as long as interests don’t change. At the beginning these equal payments to the bank consist of mainly interests and just a low amount of amortization. Later on the share of amortization grows and interests decrease, as long as the interest rate of the loan doesn’t vary.

loan amortization

If the interest rate changes in the course of the loan period, then you start paying more (or less) interests and the total payment amount increases (or decreases) accordingly. So in the graph above a change in the interest rate affects the green part of the columns, not the blue part.

Because amortization is comparably small at the beginning you might end up paying much more interests then you’d probably like. Beware that your bank won’t necessarily tell you there are other amortization types as well unless you ask for them. If you don’t explicitly tell your bank you want another loan amortization scheme, you will get an equal repayment (annuity) scheme.


Equal amortization – less costy in the long run

Those who want to amortize the loan more aggressively from the beginning might favour an equal amortization (also called equal instalment) scheme. Here you amortize the loan in an equal pace and interests you pay on top. 

As you can see from the graph below during the first years the total amount paid is higher, but over the whole loan period one pays less interests compared to the equal repayments (annuity) scheme above. 

loan amortization

Also in the equal amortization scheme a change in the interest rate will increase or decrease the amount of interests you pay. The amortization amount will nevertheless remain the same despite fluctuating interests.

From my experience banks do not actively promote this amortization type, ask for it anyhow and think about it could be an option for you to have higher payments in the beginning. It can be hard to make the numbers work for you though.


Fixed equal payments – if you have time

With this repayment method all payments are of equal amount throughout the loan period. Fixed equal payments work like the above equal payments scheme at the beginning. However changes to the interest rate don’t increase or decrease your payment amounts, but the loan period instead.

If the interest rate rises, it is the loan period that extendeds accordingly (not the payments). If the reference rate falls, the loan period shortens. The payment is always at least equal to the amount of interest.


What cost for amortization ahead of schedule?

When evaluating a loan offer it is worth to ask the bank whether you can make extra loan repayments or not and whether they will cost a separate fee. Some banks do but those who don’t won’t necessarily explicitly mention it. Always ask for the price of extra amortization payments!

Do especially check the costs when it comes to loans with interest protection, such as fixed interests or an interest rate cap, If an interest protection is involved you might even incurr major extra costs if one day you want to pay back the loan ahead of schedule. There are also loan offers for interest protection where one can repay the loan earlier without any cost: you will only find them if you ask for the price.

The cost for early loan repayment is also important if one day you want to transfer your loan from one bank to the other. Personnally I consider the free cost of early loan repayment one of the more important criteria in a loan offer.


Will you be charged for an amortization-free period?

In the second half of 2022 some loan holders asked for an amortization-free period because of rising interests. It caught a few of them by surprise that the effect of this measure was not as big as they initially thought. The reason was that they had just recently taken a loan with an equal payment scheme where amortization can be quite low, especially with long loan periods.

The effect of taking an amortization-free period is thus stronger in an equal repayment scheme than in a equal payment scheme.

There are now also quite flexible products in combination with loans, see f.ex. Nordea’s FlexiPayment.


What else can you do to avoid negative surprises?

Always ask for different loan offers, compare them not just regarding the marginal rate and ask the right questions! In order to ask right questions get prepared on how home loans work in Finland, f.ex. read this article on how to get the right home loan in Finland.

Michael Lutzeier