Follow-up financing - Request for advice

I would also cancel after 10 years. Unless the interest rate unexpectedly increased. I find the fixed interest period way too long.

Here I would like to disagree. Everyone can of course do as they please. Some finance completely variable because then they can maximize their repayment with the installment (low interest - high repayment). However, this person consciously takes on a high interest rate risk. In the current times, unless there are short-term additional repayment options available, one should secure the favorable interest rates long-term. This was already true in 2012 – nobody could have guessed that interest rates would go even lower. So you're already doing well with the 15 years – and in case we get long-term Japanese conditions, you can cancel the fixed interest period early after 10 years.

Otherwise, @toximolotow’s suggestion fits. You still have enough time and don’t need to rush anything. Maybe you can also pay a bit more into the building savings contract later with appropriate salary development and thus secure an even higher amount.

So don’t stress yourself about this now and above all: don’t be upset about the past. There is a very nice "serenity prayer," which even I have to remind myself of from time to time when I get too irritated about something.

God, grant me the serenity to accept the things I cannot change,
the courage to change the things I can,
and the wisdom to know the difference.

In this spirit.

Thank you very much for the advice. Then I'll immediately take up your prayer and look forward to a great football evening without any financing worries!

The annoying thing is that you simply cannot secure the low interest rates in the long term. Because if I choose a long fixed interest period, the interest rates are no longer low. With a 1% surcharge for 15 years instead of 5 years, you pay tens of thousands of euros more in interest right at the beginning, where the remaining debt still amounts to 100%, based only on the first fixed interest period (15 years). Whether these tens of thousands of euros are "worth it"—with 200k, you could easily end up paying around 30,000 euros (!!) in additional interest just because you wanted a longer fixed interest period—you can calculate that for yourself. It’s better to invest the 30k euros in repayment, and even if the interest rate has risen slightly, you still save because the remaining debt after the first fixed interest period is significantly lower. Additionally, you might already drop into a lower loan-to-value class, which results in an even lower interest rate. Whether and how this actually affects your own specific financing should definitely be calculated beforehand. You should in any case not underestimate the effect of a 1% or 0.5% interest difference, especially at the beginning. Although this sounds like little, it sums up to several thousand euros in a very short time. But it can also go the other way, because with special repayments, you save a fortune. How you do it in the end is up to each individual, and opinions may differ. However, one should decide consciously, based on numbers, not feelings.

Then it's better to put the 30k euros into repayment, and even if the interest rate has slightly increased, you have still saved money because the outstanding debt after the end of the initial fixed interest period is significantly lower.

One should never underestimate the effect of a 1 or 0.5% interest difference, especially at the beginning. It may sound like little, but it adds up to several thousand euros in a very short time. However, it can also go the other way, because with special repayments you save huge amounts.

How one ultimately does it is up to each individual, and opinions may vary. But one should decide consciously, based on numbers, not feelings.

I agree with you.
However, there is the risk that interest rates will not only increase slightly in the coming years but possibly also somewhat more strongly.

Everyone has to assess this for themselves. Personally, for example, I believe that interest rates will remain low for the next 2-3 years (they will hardly decrease any further) and then rise. How strongly depends on how the economy develops in the relevant EU countries.

By the way - just for fun, calculate a loan with 6% annuity. First calculation: 4% interest and 2% repayment, second calculation: 3% interest and 3% repayment. You will probably find that the loan term does not differ that much in the end. Reason: The compound interest effect is stronger at the higher interest rate. (This amazed me some time ago until I understood the reason.)

I especially find it important to shorten the term while keeping the rate the same. The shorter the term, the less interest. That is still the best security, because nobody really knows how interest rates will ultimately develop. For example, I expect interest rates to continue falling, even if only minimally. We also financed back in 2012, and almost everyone then said, "5 years fixed interest? Way too risky, rates can't go any lower." But they did, by a solid half a percent. That's quite a lot!

Rearranging the construction financing every 5 years is certainly work, but in my opinion, it is worth it mainly because of the constant reevaluation. For example: if I finance 100k Euros as 100% financing at 2.5% interest and 2% repayment, after 5 years I have a remaining debt of 87k Euros. That means I can refinance with a 90% financing after 5 years, thus benefiting from the better interest rate offered to me. With a 15-year fixed interest, I also pay for a 100% financing for the full 15 years, and at the higher interest rate. A current example would be 2.07% for 5 years, but 3.32% for 15. That's even 1.25% more! On 100k, that amounts to roughly 6000 Euros extra in the first 5 years.

After 5 years, with 90% financing, I currently pay 1.6%, while with a 15-year fixed interest, I still have to pay 3.32%. That is already double the interest rate.

If I add 2 special repayments of 5% each within the first 5-year fixed term, the remaining debt in the above example even drops to around 76k Euros (rough estimate). In the second 5-year term, the 70% loan-to-value limit is reached, and with another 2 special repayments, I even manage 50%. Then, at the beginning of the third term, i.e. after 10 years, only 1.27% or 1.22% interest is payable, while the one with the 15-year fixed interest still pays 3.32%.

You can now exactly calculate the saved interest; to be honest, I am too lazy right now, but I think it is clear that it adds up nicely. Interest rates would have to rise sharply over the next 15 years to cancel out this advantage (then you'd still break even), or even catch up.

If you make the effort to calculate what special repayments make, then (at least for me) a kind of sporty ambition develops to repay as much as possible on the side. With a "secure" 15-year term, you tend to be lulled into a false sense of security, happy not to have to worry about fixed interest terms, follow-up financing, and loan-to-value limits for a while, and pay the high price. Special repayments then tend to happen more rarely because everything is "set and done" for now. That is of course comfortable but ultimately expensive and uneconomical. I observe this with the "one more generation," meaning parents and relatives. They all have contracts with the same insurance. That convenience is well charged; for example, my father-in-law pays double for his car insurance even though his no-claims discount is significantly higher than ours.

With all this, I do not want to criticize anyone who prefers a 15-year fixed interest period. As I said, everyone has to decide that for themselves. It is also a fact that interest rates for construction financing have only moved in one direction over the last 30 years: downwards. Yes, the line is full of spikes, and some also point upwards, but only to fall even further afterward. It would take a completely different global economic situation for interest rates to trend upwards again. I consider that unlikely. And if you actually catch an upward spike, you can switch to a variable financing temporarily and wait for the next low in interest rates.

So, I confronted my "building savings commission pocketing advisor" with it. He said a contract change to the following conditions would be sensible:

- Conversion to Fuchs 02-Standard with a building savings amount of €100,000. 0.25% credit interest. Interest and repayment 6 per mille. Loan interest rate 2.75% (eff. 3.06%). Tariff change fees (!!!!!!!) €11.70. Interest and repayment monthly €1,308.00. Debt-free after 5.5 years.

The general question is whether a switch to the new tariff is worthwhile. Old conditions: 1% credit interest and approx. 3.6% effective annual interest rate.