Prepayment Penalty for Loans vs. Current Interest Earnings

  • Erstellt am 2023-02-09 18:09:26

guckuck2

2023-02-10 10:33:31
  • #1


An interesting point. The 5 years were used in the example because from then on the special termination right in the mentioned loan approximately applies. However, you have to consider both directions, for example, currently 4 years fixed deposit also yield 3.4%. You might think that longer interest rate locks get you higher rates – that is not necessarily the case. But you can also look at it as securing this interest rate and also benefiting from it in the fifth year. As always, the question is: what changes do you expect in the interest rate?

Regarding splitting. A fixed deposit ladder is recommended here. You divide your investment amount into, for example, 5 equal tranches and invest one for one year, another for two years as fixed deposit, and so on. This naturally leads to a mixed interest rate that is rather lower than locking the entire sum for the longest term. The advantage, however, is that each year you can newly decide what to do with over 20% of the investment amount, whether and how it should be reinvested.



I quite like the comparison at biallo. Currently, abcbank and Bank11 can be found there with 3.4% for 5 years. Both banks have triple-A ratings and are based in Germany. The deposit guarantee (100k) is identical throughout the EU anyway. If you don’t know them ;-) the next in line would be pbbdirekt with 3.25%, at least you might have heard about them before. "Knowing" is, in my opinion, an unimportant factor; in foreign industries you generally only "know" the market participants who stand out through massive advertising or branches. But that is usually just the tip of the iceberg. The important question is whether they are reputable or if there is a risk when you want to store your money there, for example.
 

Allthewayup

2023-02-10 10:55:55
  • #2

But wouldn't it then also be a business case to say, "forget the special termination in the 10th year," let's fully utilize the 15-year fixed interest period and rather continue investing capital, because ultimately the bank gave us "cheap money" back then.

The same applies to our mortgage: 15 years fixed interest at 1.3%. Here we will also follow the strategy of investing about 25k annually and taking interest income instead of making special repayments. Even if we could redeem after 10 years already, it would be detrimental to return the bank's money instead of letting it continue to work for us under good conditions. The prerequisite, of course, is that interest rates remain at the current level for that long.
 

WilderSueden

2023-02-10 11:06:30
  • #3
As long as the possible installments of a follow-up financing are not a problem for you, I would check off the topic of the house loan and simply invest for retirement. This also opens up other possibilities besides just fixed deposits.
 

kati1337

2023-02-10 11:12:44
  • #4


Sure, if you feel comfortable with that?
It would definitely be more economical if the interest rate level is so much higher than the loan. For many, however, it is an emotional “weight off the leg” when the loan is paid off.

After the fixed interest period, we still have a relatively high outstanding balance of over 200k. We calculated various scenarios for the time after my parental leave on how we can use the monthly surplus to pay off faster. The “golden goal” would be to be debt-free after 20 years. In the calculations, we went through various scenarios of special repayments and alternative investment forms. And the difference only really became clear to us on paper. If we made special repayments on our (still comparatively cheap) loan, we would be on the safe side. But instead, we are now mostly investing it in MSCI World ETFs. The average return would amount to such a high five-figure sum that you would otherwise just give away. Even if the market performs significantly worse in the next 20 years than in the past 50, we would still leave a lot of money on the table in the long term if we “just made special repayments.”
Maybe in the long run we’ll go for a hybrid solution where we also make special repayments. But we have already started to pump the calculated amount monthly into an ETF that would have left us almost debt-free after 20 years with average performance.
No risk, no fun.
 

Wiesel29

2023-02-10 11:12:46
  • #5
Good morning,

we also have a 15-year fixed interest period with an interest rate of 1.4%. From 2019 to 2022, we made the special repayments annually. At the beginning of 2023, we invested 2 more special repayments in fixed deposits. One for one year at an interest rate of 2.5% and one for 2 years at an interest rate of 3.15%. The fixed deposit offers were/are available at a German bank. Next year or the year after, we will see how the interest rates stand and then decide accordingly whether to make special repayments or continue with fixed deposits. Due to the first 4 special repayments, we have already reduced the outstanding debt so much that we will not need follow-up financing.
 

KarstenausNRW

2023-02-10 11:12:54
  • #6
You can get the interest rate for 5 years everywhere.

But once again. Anyone who invests their money for more than 1-2 years today has not recognized the times. First, the interest rate for one year is only marginally lower, and second, not all interest rate increases have yet been reflected in the market. I certainly wouldn’t tie myself to 3.x% for 5 years when, due to the current interest rate policy worldwide, interest rates will be (significantly) higher again in one year.

 

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