Still, is it worth replacing home loans this year?
Is it worth replacing home loans this year? Many people have the question, which is not the case with the usual empty slogans and sponsored content, but there are not many specifics available. If we reverse the question, why wouldn’t it actually help us to replace our home loan in a market environment that offers us significantly more favorable interest rates than when we took out a loan or converted our foreign currency loan into a USD account?
What kind of home loans can you get?
In a very simple way, it is worthwhile to override all existing home loans and see if we can do better with the transformation and / or replacement of the construction, as if we stay with our existing loan. It is worth defining our goal in the first round:
- reduce your monthly repayment
- reduce the maturity
A concrete example of how the article is calculated
Market-interest home loan.
June 2027 15. expires but recently 2030.06.17. is marked as the expiration date of the contract.
Payment installment: 152 208 USD
Capital Debt: 15,623,757 USD
This construction is a USD loan denominated in USD from a Credit Scorer-based home loan. Few people know that their USD loans are linked to the 3-month linked USD loan. That is, if the Bubor changes, it will appear on the installment no later than 3 months later. In addition to the interest period, there is also an interest spread period, and it is worthwhile to be aware of the expected development of the repayment installment.
Characteristics of USD-denominated foreign currency loans
- the interest period for USD loans is 3 months,
- as a rule, the interest rate on the loan after conversion into USD = 3 months BUBOR + the initial interest rate on the foreign currency loan, but
- the interest rate on the USD-denominated loan may not be higher than the original rate with the condition that
- at least 1% interest margin, ie (based on the current BUBOR) 3.1% interest should be charged to the banks;
- up to 4.5% (home loans), or 6.5% (free-to-use mortgage loans),
- the above-mentioned interest margins are calculated without any charges charged on a regular basis.
Do you want to apply for a new home loan for floating interest rate or longer term interest rate fix offer?
When we think about triggering, it is very important to clarify this circumstance. Frequently, bids with different interest rates are washed out of customers and only the lower starting installments will be decisive for them instead of risk analysis.
What is the Interest Period Risk? With cheaper, floating-rate home loans, we run the risk that, in the event of price increases, our credit will rise almost immediately. With more expensive, but longer-term, fixed rate home loans, we write down that our interest remains the same (and our repayment) when the market raises interest rates and makes it more expensive.
A specific calculation
Based on the static example, the interest rate on the floating rate loan will remain in the next 4 years (2.23%). I then examined how the repayment of the floating rate loan and the total repayment are relative to the 10-year fixed rate qualified consumer friendly loan, if in the worst case the interest rate would be 8% in the last 6 years in case of variable interest (5%) rise in interest rates).
We can see that a 5% interest rate change from the fifth year would result in a 41% increase in our original repayment installment (variable interest rate), whereas this increase would be 10.2% compared to the initially higher fixed rate repayment. The equilibrium state, when we pay exactly the same amount, is 7.55% interest rate after 4 years for our floating rate loan.
In this example, our ultimate conclusion is that we can imagine a situation where, over the next 10 years, our variable interest rate will be higher than 7.55%?