You bought your house. Buying your own house on credit is a decision that costs you 30 years. You made this decision and you have to pay for 30 years to become the owner. Whether you made the purchase through a state-guaranteed loan or through a classic mortgage/real estate loan, you are in the process of paying for a long period, double.
It is good that you contracted the loan for a long period. Although the period seems too long to you, this way you will have a lower monthly payment amount. The pressure on your budget is less and you will be able to pay it with a lower salary than the one you have now.
Buying your own house on credit – a good decision?
Let’s see what it means to get into debt for a longer or shorter period of time!
Let’s say you borrowed 50,000 euros from the bank.
For 30 years of loan you have a monthly installment of 1,360 lei. You repay a total of 106,000 euros.
For 15 years you would have a monthly installment of 1,957 lei and repay a total of 74,400 euros.
The installment represents the amount you pay monthly to repay the loan made to the bank. Your loan is made up of the borrowed amount called the principal and the interest that you pay to the bank for giving you the money you needed. The borrowed amount, but also the interest, is repaid by paying them monthly. Thus, the installment is made up of the amount you borrowed, in a proportion of 20% and the interest in a proportion of 80%. At the beginning, in the first years of the loan, the payment is made more of the interest to assure the bank that you are providing the guarantor of its trust to provide you with the amount necessary to achieve your financial objective.
Home loan – possibilities to streamline your financial situation!
We have a difference of 597 lei between the monthly installment of a loan contracted for 30 years and one for 15 years. The amount to be repaid is 31,600 euros higher for the loan contracted for 30 years compared to the one contracted for 15 years, a fact explained by the capitalized interest. Capitalization occurs over time and the amount increases because it has a longer period in which the interest is compounded.
But let’s focus on the monthly installment first!
The difference in the monthly installment is 597 lei. The comparisons are made on the same interest. However, the interest will not be fixed for the entire loan period. Whether it is 15 years or 30 years, it will fluctuate in both periods and you will have more or less to pay.
Your financial situation can change in 15 years, as well as in 30 years.
What were you doing 30 years ago?
Maybe you didn’t even exist. Is that right? If you are 25-28 years old, you were not even planning to appear in the world. So, your life can change in the next 30 years, even in 15 years. A family will appear, children will appear, the need for a car or a new car, vacations, loss of job or health. And, if the rate is too high, how could you carry out all the plans in parallel?! That is why financial planning specialists recommend contracting a long credit period (the longest possible) and closing early. You have the opportunity to close early and get rid of the long period, but also not pay a lot to the bank.
How can I close my home loan early?
There are several ways you can prepay your cash advance.
You can pay an amount monthly in addition to the monthly installment established by the bank. You can also pay another installment monthly or pay a larger amount annually. You can reduce the credit period or the amount borrowed.
If you need to reduce your financial pressure on the budget, then you will pay from the borrowed amount, on the other hand if the pressure is psychological: the duration of the credit, then you will pay another installment monthly.
Regardless of whether you pay monthly or annually or choose another frequency, this option also brings with it a risk: the risk of not having money to pay the installment if you encounter financial problems (loss of job or health). Problems can arise at any time and they do not bypass anyone. It becomes a problem when there are no reserves, because the bank does not exempt you for a period of time, until you recover, just because you paid in advance. That money does not represent an exemption from paying the monthly installment.
Your money makes other money and you close your loan
The accepted variant to close the loan early and used in developed countries is to invest the amount saved monthly. The investment must produce at least 1% more than the interest you pay on the loan.
Let’s say that you pay interest on the loan at 5% annually, and on your saved and invested money you receive 8% annually, with capitalization. This account provides you, through capitalization, the necessary amount that you can repay the bank. When you have collected the amount you still have to give on the loan and withdraw it from the account, you pay the loan and close the debt. This way you end the loan a few years earlier and you no longer pay interest to the bank.
The most profitable accounts of this type are those that offer the security of the money invested, a good return, exemption from paying corporate tax and an active investment, by companies with a long history and a positive history, on the capital market.
The advantage of an investment is that in times of financial crisis, you can pay from your savings account the amount necessary to solve problems, also functioning as a long-term financial security option.
Own house purchased through a 30-year loan
Let’s say you pay an additional monthly rate to the bank. Thus, the loan closes in 130 months, that is, 19 years earlier. By investing and capitalizing your money, the loan would close 20 years earlier. You no longer pay interest in the amount of: 29,800 euros.
Why does the interest rate on the loan fluctuate and why does my loan rate increase?
The loan rate is closely correlated with the financial market. Transactions are recorded at the financial market level. The increase or decrease of your rate is influenced by the level of lending that is achieved at the level of the entire market. If the level of lending increases, then the banks recalculate the interest rate according to this level. Banks need liquidity to provide money to those who come to borrow. So basically, it is a reference index regarding the demand and supply in the market.
The loan interest (DAE) is composed of the bank’s fixed margin (around 2%) and the reference index that implies a fluctuation in the rate. The fixed margin covers the bank’s costs with employee salaries, the cost of maintaining the branch, ATMs, etc., and the fluctuating part represents the market loan ratio. It is calculated depending on the level of loans made over a period: 3 or 6 months.
Home purchased through a fixed or variable interest loan?
We have seen how the variable interest is calculated and depending on what. When you have a variable interest rate on your loan, your rate can increase or decrease depending on the level of loans in the market. With a fixed interest rate, you do not expect it to increase or decrease, but it will be higher than the variable one. This way, the bank ensures that it will not lose when the market interest rate is higher. Instead, you risk paying more than another contractor who has a variable interest rate.
All of this information is objective, reported by financial planners and consultants. Specific recommendations are made individually. To establish a discussion on streamlining and early closing of your loan, you can set up a financial consulting session that you can find here: https://www.psihologiabanilor.ro/consultanta-financiara/
I invite you to write me in the comments the answer to the following question: How did you choose your loan and for what period?
Good luck saving money and achieving your financial goals!
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