Graduated Payment Schemes Explained

Updated 23 Aug 2017 – By Loanstreet


You’ve just graduated from university, and you’re ready to take on the world; find a great job, wean off your parents allowance and become financially independent. Of course, over time, you’d need a home to call your own where you can settle down to build a family. 

Now, the first thing that comes to mind would probably be, “how am I going to afford it?” After all, property prices today in the prime urban areas are hardly on the low side. Well, this is hardly a common issue, and graduated payment schemes come into play to fill this gap.

Designed for fresh graduates and the younger working class, graduated payment schemes, as its very name implies, lower the typical financial barriers to owning a home. While it may sound simple and attractive to you yuppies out there, understanding the mechanics behind these schemes will help you better make sense of it, and ultimately, whether or not it’s suitable for you.

How it works

As this scheme’s concept revolves around the target group of graduates, it aims to be commensurate with a graduate’s earning capacity. As such, its distinctive qualities are, basically, low application requirements, flexible repayments and low initial repayment periods. On the same cue, however, you have to fall into the category to be eligible for such a scheme, so banks usually require applicants to fall within a certain age range, have recognised tertiary qualifications, be a first-time property buyer, and so on, depending on the bank offering the plan.

Zooming in, the key feature of this type of plan is that buyers are allowed the flexibility to pay lower instalments at the beginning of the loan tenure, usually up to five years, and sometimes only the interest portion of the plan. After the initial low-repayment period, buyers will progress onto standard payment amounts as income levels gradually rise.

For example, John, a law graduate in his first job, might not have the financial capability to keep up with typical mortgage repayment amounts. Over a few years, as John climbs his career ladder, gaining higher income, he becomes financially capable enough to keep up with standard mortgage repayment rates. As the initial low-repayment period expires, John is fully capable of taking on the jump in monthly expenses. Thus, as a home-buyer, John has become able to purchase a home shortly after graduation with minimal financial burden, thus sparing him the finance for other purposes, like buying a car and supporting his parents financially.

Caveats

While these schemes are indeed attractive for graduates who have been working for a short period of time, there are things to consider due to the way it works. For one, although the initial repayments is low, after the set period, buyers are assumed to have obtained the financial capability to keep up with standard-rate payments, and thus, requires as such. However, this remains an assumption. In the case where the buyer has not reached a particular level of income, the repayments then become a pretty significant financial burden.

Secondly, the overall expenses of such plans are higher than that of standard mortgages. Look at it this way – you can’t have your cake and eat it, too. As the buyer is allowed to pay lower amounts during the initial period, all or most of it goes towards offsetting monthly interest charges. Naturally, the amount owed for the remaining tenure after this low-repayment period would be typically higher than that of a standard mortgage scheme. In other words, you get to enjoy a low-burden repayment period, but overall pay comparatively more for a piece of property.

Conclusion

At the end of the day, graduated payment schemes work like typical mortgage plans, just with a few tweaks to ease buyer’s financial burdens for the first few years, in exchange for a higher overall price. If you’re seriously considering taking on such a scheme, be prepared to take the jump in monthly financial commitments at the end of the low-repayment period. The last thing you’d want is being unprepared and defaulting on your home loan payments, especially during a time in your life when financial commitments are popping up everywhere while you try to focus on your career.

Finally, if you are considering applying for a home loan, don’t forget to use our Home Loan Comparison tool to find the best home loans in the market today. 

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