Special repayment in the loan contract - experiences with financing

Then I must have misunderstood you. I only see disadvantages for myself in repaying quickly or making special repayments at such low interest rates.

Then I must have misunderstood you. I only see disadvantages for myself in repaying quickly or making special repayments with such low interest rates.

If that's how it is for you - then that's perfectly fine.

The important thing when "saving up" is diversification. That means: property (repay)/stock ETFs or similar/retirement provision.

All of this should be in a good balance. If you repay minimally, have an interest rate fixed for 10-15 years, and due to a changed interest rate after 10-15 years of over 3%, for example, can no longer repay easily and MUST fall back on your savings, for example also due to a stroke of fate, etc., then you cannot IMMEDIATELY withdraw your ETFs from your portfolio. The timing of the payout is crucial here, and that is where the risk comes in, as already mentioned by my predecessors.

So you should weigh carefully and always think precisely about in what ratio you do what/how/where... Ultimately, you're running a small private business :)

I handle it similarly to blubbernase. I have a 20-year loan agreement. I will repay 2% and invest the remaining 1% in the MSCI World ETF. This way, I have the chance to achieve significantly higher returns and basically build up capital on the side. Because everything that is put into the property as a special repayment is GONE and cannot be recovered. In the case of unemployment/illness etc., one could, unlike with a special repayment, withdraw money from the portfolio (regardless of its value) and continue to pay the house for a longer period of time. With such a long loan term, I actually see ONLY advantages for a boring and long-term ETF investment. And if it goes well (8% average return), I will be even better off after the loan term expires (with compound interest effect).

I handle it similarly to blubbernase. I have a loan contract running for 20 years. I will repay 2% and invest the remaining 1% in the MSCI World ETF. This way, I have a chance to achieve significantly higher returns and basically build up capital on the side. Because everything that is put into the property as special repayment is GONE and cannot be recovered. In the case of unemployment/illness etc., one could, in contrast to special repayment, withdraw money from the portfolio (regardless of the current value) and continue to pay the house for a longer period. With such a long loan term, I actually see ONLY advantages for a boring and long-term ETF investment. And if it goes well (8% average return) I will even be in a significantly better position after the end of the loan term (with compound interest effect).

You can withdraw money from your portfolio at any time – correct, but if the ETF is currently at a low, that could mean an even worse interest situation than your savings with the special repayment would be. The illusion that by investing regularly in ETFs (similar to how you do it and also how I do it) you face no risk and easily achieve an average return of 8%, and after 10 years can withdraw €10,000 without incurring losses, should really be abandoned quickly.

Yes, it makes sense, economically speaking, no question! But there's a lot more involved! Ultimately, it’s also largely a "mental thing" – knowing that the money is GONE, the loan decreases, and after 10 years the repayment rate is DEFINITELY significantly lower, is also good for the psyche… Everything has its pros and cons. You should simply diversify well and not put all your eggs in one basket :)

But it’s also a personal matter that everyone has to decide for themselves. There are some people who simply don’t feel comfortable investing money long-term (ETFs are almost exclusively meant for long-term investment) – then it’s just not the right choice!

Feel free to also search on Google for the MSCI World Return Triangle

But you have 2 mistakes in your line of thought.
1.) The return triangle shows you the pre-tax return. To seriously compare with the loan, you would have to use the after-tax return.
2.) The return triangle shows the return for a lump sum investment. But you save money monthly. Accordingly, for each individual savings rate, you would have to decide whether to take the risk or not, because the period until the final maturity gets shorter and shorter.

From my own experience, I can tell you that this is quite simple at the beginning, when the amount in the ETF is relatively low. But when the portfolio value rises and the ETF reaches highs like just now, at least I often consider whether it might not be more sensible to shift to partial prepayment.
At €10,000 and a 50% drop... well, that's just one month's income lost.
At €50,000, a 50% drop really hurts.

My main loan is much more expensive, as I took it out 8 years ago. With almost 3% interest, which I would have to achieve as after-tax return, in my opinion the risk with an ETF is too high. Partial prepayment is done there at most.
With the KFW loan at 1.4%, I had the money invested in ETFs up to now. However, the amounts in the portfolio then became too large for me, so last year and this year I also partially prepaid a large portion there. (At that time, special repayment or full redemption was still allowed with the KFW loan)

That doesn’t mean I wouldn’t do it that way again, my head says yes. On the other hand, the fear of a crash increases with growing sums.
But you don’t have to look at it only in black or white. A mixed form – saving in ETFs and making special prepayments during market highs – is great.

1) The illusion that investing in an ETF savings plan (similar to how you handle it and I do as well) involves no risk and reliably yields an average return of 8%, allowing you to withdraw €10,000 after 10 years without losses, should really be discarded quickly. 2) You should simply diversify well and properly and not put all your eggs in one basket :)

1) That's why the long term of 20 years, so you can react better. Personally, I would have concerns with an investment period of 10 years. 2) I agree with you, and that is the main reason for me.