You may have heard the term bullet loan and wondered what it really is. Bullet loans are not the most common types of private loans, but in some situations they can be a good alternative to a traditional monthly loan. Non-recurring loans have been used by investors and companies for a long time, but nowadays, one-off loans are also coming to the supply of ordinary retail clients, primarily senior clients, as a good alternative to various financing needs.
Thus, the bullet loan is a one-time mortgage loan or one-off loan loan , and its name implies, it is paid off once the agreed loan period has expired. When a traditional loan is repaid monthly at a steady rate until it is fully repaid, the lump sum loan is repaid in one installment. The repayment date is often agreed within a few years, typically 5-10 years.
Although there are no installments on the bullet loan during the loan period, the borrower still pays interest to the lender on the loan. In some cases, the loan has a zero interest rate, which is called a zero coupon loan. However, this is quite exceptional as such lending is not a very lucrative activity for the lender.
What situations is a bullet loan suitable for?
A bullet loan is suitable for situations where the borrower is seeking temporary financing and wants to minimize their expenses during the loan period. Loans are often made for a variety of investment activities, allowing the investor, in addition to minimizing costs, maximizing the funds invested and thus the return on investment. For example, buying an investment home is a typical bullet loan investment.
When an investor buys an apartment on a bullet loan and leases it, he not only has the apartment but also has a steady rental income. The purchased home serves as a collateral for the loan, and at the same time, the rental income can be invested productively in other investment instruments and earn a higher return. At the end of the loan period, the loan will be repaid with the proceeds of invested rental income or by selling the apartment.
Not only for private investors, a bullet loan can also be a good tool for companies that need temporary financing. Although a one-time mortgage loan is typically a form of loan used by investors and is not usually taken for home use, for example, a one-time mortgage loan may become familiar to private clients, for example in the form of a reverse home. loan
Thus, although a one-time loan is typically not used to acquire a home, a so-called reverse mortgage is an opportunity, for example, to help an elderly person stay in an old family home for longer. Home-based housing may be debt-free and otherwise reasonable, but for example, major renovations in a housing association may increase your monthly living expenses so that the pensioner’s income is no longer sufficient to cover both the cost of living and other living expenses. In this case, a reverse mortgage can be an alternative to a home loan or a consumer loan. When using a reverse home loan to pay for a homeowner mortgage, the monthly expenses remain reasonable, and even a low-income pensioner can continue living in a home that has been home for decades.
Sometimes older people also want to use their wealth accumulated during their long working lives for travel or otherwise a comfortable life, and a reverse mortgage provides a great opportunity to use the savings that have been accumulated over the years and invested in a home.
A reverse mortgage is thus a non-recurring loan with the borrower’s housing as collateral. The loan is not very common yet, but it is constantly gaining popularity. Older people, especially those living in the Helsinki metropolitan area, are most likely to seize the opportunity.
Thus, during the loan period, only the interest is paid on the loan. Therefore, it is good to consider whether you want to raise the entire loan amount immediately or whether you do not want to withdraw part of it for the future. If you raise the entire loan amount in one installment, you will, of course, pay a higher interest rate during the loan period. On the other hand, if you wish to draw down a loan in several installments, you will probably have to pay more for the loan withdrawal costs.
At the end of the loan period, the loan will be repaid in full to the lender. In a reverse mortgage loan, when the loan is due, the apartment is often sold, and the owner moves to a nursing home, for example. Reverse home loans usually only get about 50-75% of the value of the home, only at the time of sale, often the homeowner still has a nice amount after paying off the loan.
On the other hand, in the case of a reverse home loan, there is typically flexibility in the terms of the loan so that, for example, if the borrower is still in good shape and wants to continue living in the apartment, the loan period can be extended.
What are the terms for a bullet loan?
The terms of a bullet loan, like any other loan, always depend on the situation, both the borrower and the lender. When determining the terms of a loan, influencing factors may include, but are not limited to, the size of the loan, the time of the loan, the borrower’s prior payment history or, for example, the subject of the loan. The interest rate of a bullet loan may be fixed or floating, and the loan may be raised in installments or even paid off, depending on previously agreed terms. It is worth noting that the interest charges on a one-time loan are generally higher than the monthly repayment of the loan because, as the loan is not repaid during the loan period, interest is paid continuously on the entire loan. The interest rate on a one-time loan is also typically slightly higher than the repayable interest on a loan.
As the reverse mortgage loan is still relatively new to the loan market, it is a good idea to read the terms of the loan very carefully and make sure you understand all the features of the loan and the terms of the agreement. And of course, this loan is also worth bidding for and negotiating, as there are several providers on the market.
Risks of a one-time loan
For example, in a reverse mortgage, the home serves as collateral for the loan, so there is little risk to the lender. When the loan is due, the apartment can be sold and the loan set off against the proceeds of the sale. For the borrower, this does mean that the home must be forfeited. Therefore, when borrowing, it is worthwhile for the borrower to find out carefully whether the loan period can be extended. If, for example, the borrower is still in such good condition at the time of loan repayment that it is not appropriate to move to a nursing home and would like to continue living in his / her home, the lender must be negotiated for repayment. If this possibility is not taken into account in the original loan terms, negotiation may be difficult.
However, due to the long loan period, it can be difficult to assess the development of the value of the dwellings. For this reason, a loan is usually only granted for 50-75% of the value of the home. In addition, the location of the dwelling affects the availability and terms of the loan. For example, in the Helsinki metropolitan area, the value of housing is likely to remain stable or increase, with a relatively low risk. In some other areas the situation may be different. It is also worth noting that if the value of the home has dropped significantly during the loan period, the lender may not be very keen to extend the loan period even if the borrower submits it. In this case, the mortgage is sold or the borrower has to repay the loan in some other way.
Of course, the borrower also faces some risk due to interest rate fluctuations. If no fixed interest rate is agreed on the loan, the interest rate of the loan may fluctuate a lot during the loan period. Before borrowing, it is good to think about what would happen if the interest rate suddenly doubled – could the borrower still be able to pay the monthly interest expenses?
Of course, the same laws apply when you take out a bullet loan for an investment home. Here too, the home you buy usually acts as a collateral for the loan, and if the other investments made during the loan period have not produced enough to pay off the loan, the home can be sold and the loan paid off with proceeds of sale .
In general, therefore, earning a loan, especially from a traditional bank, requires collateral, sufficient income and also the borrower’s creditworthiness. Where do you lend without credit history ? Lack of credit information will, of course, limit access to credit, but it is by no means impossible. However, it’s always worth asking. In this case, it is a good idea to arrange a personal meeting with the lender and provide the lender with a detailed account of your income and ability to pay, as the weight of your youth bumps may be reduced if you can demonstrate that your ability to manage your finances is now in place. If the borrower has defaults and the loan is therefore considered to involve higher risks, the borrower is also likely to pay a higher interest rate on the loan than he would have paid without the defaults.