Use special repayment or save to pay off a small loan?

2018-06-22 13:56:22

Hello everyone,
for our house we have taken out the following loans:

Loan Amount Interest rate Fixed interest period Remaining debt Special repayment
KFW 153 €100,000 1.65% 20 years €39,000 unlimited
KFW 124 €50,000 1.18% 10 years €32,000 none
Bank loan €200,000 1.65% 20 years €105,000 up to €10,000 p.a.

Now I have the question of what is the best option to pay off the loans faster and cheaper:
-Not making any special repayments and repaying the KFW 124 loan after 10 years with the saved money
-Making special repayments on the bank loan
-Making special repayments on the KFW 153
-Making special repayments on both the bank loan and KFW 153
What would be the advantages and disadvantages of the respective options? Surely this can be calculated, but I just can't figure it out right now. Also speculative is the fact that one does not know how high the interest rates will be in 10 years when the fixed interest period of the KFW 124 expires.
Thank you very much

2018-06-22 14:00:18

Hello word-e,

surely it can be calculated, but it is not done by just calculating, as you rightly point out, there are also unknowns.

For now, it would be important to know when you signed these contracts, or when they expire.

2018-06-22 14:06:18

For the time being, it would be important to know when you signed these contracts, or when they expire.

The contracts were signed in winter 2016. The bank loan was drawn down almost a year ago. However, the KfW153 loan has not yet been fully drawn. Repayment is therefore already underway, except for the part of the KfW153 that has not yet been drawn. This will be drawn down in the coming months.

2018-06-22 14:06:56

There are actually two approaches:

1) If you want to reduce the risk of the remaining debt of the KFW 124 after 10 years, then you pay it off or save the money for it. I wouldn't do that, since €32k remaining debt does not pose a big risk. Whether you pay 2 or 4% interest on it after 10 years does not make a big difference.

2) Otherwise, the principle is to pay off the most expensive loan first. Since the other two tranches have the same term and interest rate, I would pay off the bank loan first, because its prepayment options are limited. In the case of a sudden windfall, it would be helpful to still have as much remaining debt as possible on the KFW 153, which could be serviced through the unlimited prepayment rule valid there. But this advantage is gone after 10 years anyway, because every loan can be terminated in parts after that, i.e. after 10.5 years, all loans can be prepaid without limits.

So I would partially prepay one of the tranches at 1.65% with a slight preference for the bank loan.

Others would repay as little as possible given the low conditions (probably concluded at an absolute interest low and/or good loan-to-value ratio) and invest the money elsewhere...

2018-06-22 14:11:26

There are basically two approaches:

1) If you want to reduce the risk of the remaining debt of KFW 124 after 10 years, then you repay it or save the money for it. I wouldn’t do that, since €32K remaining debt does not represent a big risk. Whether you pay 2% or 4% interest on it after 10 years doesn’t make much of a difference.

2) Otherwise, the principle applies to repay the most expensive loan first. Since the other two tranches have the same term and interest rate, I would repay the bank loan first, because its prepayment options are limited. In the case of a sudden windfall, it would be helpful to still have as much remaining debt as possible on KFW 153, which you could repay under the unlimited prepayment rule valid there. But this advantage is gone after 10 years anyway, because at that point every loan can also be partially terminated, i.e., after 10.5 years all loans can be prepaid without limits.

So I would make a prepayment on one of the 1.65% tranches, with a slight preference for the bank loan.

Others would repay as little as possible with these low conditions (probably signed at absolute low interest rates and/or good loan-to-value ratio) and invest the money elsewhere...

I couldn’t have said it better myself :)

2018-06-22 14:15:09

There is a short-term and calculable economic perspective and a long-term perspective where an interest rate must be applied or fictitiously considered after the end of the fixed interest period.

From a purely economic point of view, one always repays the higher interest rate, but if you consider security, i.e., the fixed interest period, it can backfire, because the higher interest rate is usually also the safest interest rate with different fixed interest periods, and if after 10 years the remaining debt at the lower interest rate has to be refinanced expensively because the additional repayment capital repaid the more expensive interest rate, then it may have been a mistake.

What additional repayment capital is available? What expected amounts are we talking about annually?

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Use special repayment or save to pay off a small loan?

world-e

Rumpelkopf

world-e

Alex85

Zaba12

Rumpelkopf