Straight mortgage

A straight mortgage, also called a straight line mortgage is a type of mortgage for which debt repayments are determined linearly over the amount of installments. The interest due for each installment simply depends on the remaining outstanding debt. This repayments schedule results in higher repayments in the beginning and lower repayments  at the end. This is simply the result of high outstanding debt initially, combined with equal debt repayments over each period.

Straight line mortgage formula

The interest, due, I, equals the interest rate over the period, ip multiplied by the outstanding debt, OutDebt.

I =i_p \cdot OutDebt

The periodical debt repayment, DebtRep, equals the total initial debt, TotDebt, divided by the amount of periodical repayments, P.

DebtRep = \dfrac{TotDebt}{P}

The total repayment, TotalRep, just equals the sum of the interest due, I, over the period plus the periodical debt repayment, DebtRep.

TotalRep =I + DebtRep

Straight mortgage (dis)advantageous

One advantage of the straight mortgage is that it is fairly simple to calculate your repayments yourself. As such, many people feel comfortable applying such a repayments scheme. Additionally, the straight line mortgage has the advantage of reducing outstanding debt faster compared to many other repayment schedules. As a result, interest cost over the period are also lower. Moreover, banks could be somewhat more generous in granting loans, since the risk is a somewhat lower due to the faster debt reduction. The downside is that higher repayments need to be payed in the beginning, which is exactly the phase wherein liquidity needs for households are the highest.

Summary

A straight mortgage is a simple and cost efficient way to repay your mortgage debt at a fast pace. However, you should keep in mind that you are able to pay back the high installments at the start of the loan.

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Straight line mortgage

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