Real Estate Financing: The deceptive charm cheaper construction loans

Those who buy a house now, seduced by low-interest rates, is an intriguing problem is one. Because the repayment takes longer.

If you believe that Sisyphus was a happy man because his life he was doing a solid job without ever ready, then read no further. However, you do not want to end up like him, then do it – especially if they want to pay off a mortgage.

You might end that is quite like the tragic hero of Greek legend. For, in fact, it has never been as cheap as it is today to finance a real estate purchase. For about two percent interest per year, it already comes into the home, in the 80s a mortgage still cost a whopping 11.8 percent interest. That’s why many home buyers think that they are also much more debt than previous generations buyers. Exactly the opposite is the case. Those who do not pay attention, pay a lifetime from credit rates without ever becoming owners. This is the so-called “Tilgungsparadox”.

It sounds illogical, but: pay, the lower the interest rate, the longer homebuyers a loan from. The explanation is this: In the most common form of financing, the annuity, you regularly a fixed rate loan pays back over the entire term. This rate is made up of interest and principal. The interest rate remains the same over the entire term. The repayment rate is changing. Currently, the interest rate is about two percent, as the initial repayment rate put many banks traditionally one percent, adds up to three percent. Those are the annual rate. For a loan of EUR 200 000 per year, the 6000 Euro (4000 Euro interest 2,000 euros repayment), ie 500 euros per month, paying off the customer are.

Now reduce each rate of debt – to which the two percent interest accrues annually. After a year liabilities by EUR 200 000 2000 EUR repaid (one percent), there remain 198 000 euros. 3960 Euro interest rates are due to the 40 euros less than before. But the redemption rate now is not reduced by this 40 euros – since the monthly rate will remain the same but yes the repayment increases by exactly that amount. Over the years, this means that the rate of interest charged at the rate becomes smaller and smaller and the capital is growing. Just as the home buyers make it pay off the loan not only in 100 years (as long as it’d take one percent redemption otherwise, would be removed to 100 percent of the loan) but earlier.

And this is where the low-interest rates revenge. Because the lower the interest rate already is, the slower fall, of course, the “interest savings” each year (these are the 40 Euro in the example) and the slower growth of the capital element. This leads to the paradoxical situation that a loan – regardless of the amount – is removed to eight percent interest with a repayment of 1 percent after 27.6 years while paying off a cheap loan for two percent of all 55 years.

But now no one needs a life sentence squeeze credit rates when he makes instead of a: Increase the repayment. However, the rates of only a few banks on its own, after all, they earn well in long-term contracts. A few institutions, after all, have introduced a minimum repayment of 1.5 percent or two at a construction loan. At least two percent, it should actually be better longer. Especially since a higher amortization rate usually also means better interest rates.

Real Estate Financing: Two out of three prepayment penalties are too high

A package height can be for the repayment, not name because of course, this increases the monthly loan installment, and how much load can withstand a borrower, he knows only himself. When 200,000-euro loan a repayment rate of two percent means a monthly rate of 666 euros (instead of 500), at three percent, there are 833 euros. Anyone who does not want to do from the beginning or can, which should hold at least one repayment block change option for later in the contract. Keep it flexible.

Because on permanent Niedrigtilger later lurks a great danger once the fixed interest period of the contract expires. And usually, the customer secure the currently low-interest rates so only for 10 or 15 years. lending rates to rise in the coming years so strongly again and the remaining chunk of debt still very great because you barely have removed him, the rates for the house quickly priceless – and Sisyphus can really salute.