If you want to build a house, you often first look at the interest rates. However, the amount of the repayment rate and special repayment options also play a decisive role in minimizing the total interest costs. In this article you will read why a higher repayment rate makes sense, especially in low-interest phases, and to what extent higher repayment rates affect interest costs.
Immediately on the desired topic
- Why a higher repayment rate makes sense in low interest rates
- Agree special repayment right
- How to save money with special repayments
- Special repayments: flexibility in repaying the loan
- High repayment rate and special repayments: advantages and disadvantages at a glance
the essentials in brief
- In low interest rates, a higher repayment rate is recommended because the monthly rate is not significantly higher due to the low interest rates and the loan is repaid earlier and lower total interest costs have to be paid.
- Special repayment options should also be used whenever possible, since they also reduce the total interest cost of a loan.
- Banks offer various types of special repayments, including annual special repayments with a fixed amount, a one-time special repayments with a maximum amount during fixed interest rates or an annual special repayment based on the loan amount.
Why a higher repayment rate makes sense in low interest rates
Invest in higher repayments at low building rates
Whoever builds a house for the first time and deals with the topic of mortgage lending is usually amazed: How can it be that a mortgage loan over 100,000 dollars does not generate a much higher burden than a consumer loan over a few tens of thousands? On the one hand, this is due to the significantly lower interest rates that banks charge for mortgages. But it is mainly due to the low repayment. For mortgage loans, one percent of the loan amount per year is mandatory, ie 1,000 dollars for a loan of over 100,000 dollars.
This results in a monthly charge that is easy to cope with – but also a duration of the financing, which is usually measured in decades. And that is why it is so important, especially in times of low building rates, to invest the scope that the interest rate level allows in a higher repayment.
Your benefit from a higher repayment rate of one percent:
- You make 37,342.37 dollars less interest payments.
- Your loan is repaid 12 years and 5 months earlier.
- The monthly rate is only 83.33 dollars higher.
Agree special repayment right
This option of being able to make further payments in addition to the monthly installments is called a special repayment right. This is not possible with every mortgage loan and with every mortgage lender and should therefore be included in the decision when comparing the providers.
How to save money with special repayments
The right to special repayment literally pays off if unforeseen investment income increases your own liquidity. These include, for example:
- Employer bonus payments
- exceptional investment income
- monetary gains
It is absolutely worth using this capital for a special repayment. In principle, the following applies: Special repayment always leads to savings that are greater than the sum itself. This not only reduces the outstanding debt at the bank, but also the interest that would have accrued on this sum in the coming years or decades.
Your advantage through the annual special repayment option of 500 dollars:
- In comparison, you pay 2,924.65 dollars less interest.
- After 15 years, you repaid 10,424.65 dollars more.
- If the borrowing rate remains the same, the loan is repaid 1 year and 9 months earlier.
It may well happen that banks apply an additional interest premium for a special repayment option in the loan agreement.
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Special repayments: flexibility in repaying the loan
Some institutions set annual maximum limits for special repayments, others set a certain percentage of the mortgage loan over a period of several years. Many banks today grant a special repayment rate of five percent of the loan amount per year.
Anyone planning to make special repayments from the start should ensure that these are possible during the fixed interest period. It is also interesting not only how high the maximum repayment may be in a certain time, but also how often. Those who have the opportunity to make additional repayments more often should do so.
A special repayment is possible regardless of the contract even after the interest rate has expired: the borrower can minimize his remaining debt at this point and negotiate a new interest rate. Even if the bank changes and the contract is terminated, the loan can be reduced. Loans with a variable interest rate usually provide for special repayments as standard.
After the special repayment, the borrower can decide whether to pay the remaining installments in the term agreed at the start, ie have lower monthly costs, or to keep the amount of the installments and thus pay off the mortgage loan more quickly.