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Old 01.05.2020, 10:31
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Mortgage advaice required

I am in the process of buying a property in Germany and am now trying to organise a mortgage. I have the option of partially financing the property using a so called KfW mortgage. This type of mortgage includes a goverment subvention of 15% up to a maximum of 120,000 euro. So if I borrow 120,000 I only have to pay back 102,000 euro and the 0,95% interest rate is calculated on the sum of 102,000.



I am considering 2 choices:


1. Take 10 year fixed rate of 0,95% with the first year interest only and pay back interest and outstanding capital of 102,000 over the remaining nine years. Total interest payments will be 4.060,10.


2. Take 10 year fixed rate of 0,95% with all 10 years interest only and pay back 102,000 in one lump sum after 10 years. Total interest payments will be 9861 euro.


Which do you think is the better option?


Calculations can be done here https://www.kfw.de/KfW-Konzern/Servi...ner-und-Tools/ under Energieeffizient Bauen (153)
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Old 01.05.2020, 10:43
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Re: Mortgage advaice required

I´d personally go for the payment of interest and capital as you never know what is in 10 years.

Probably also comes from seeing what happened to my brother, who only paid interest as "ah the markets will go up anyway and if you sell you have more than enough to pay the capital" and ended up selling when the market was at a very low point.
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Old 01.05.2020, 11:10
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Re: Mortgage advaice required

It depends
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Old 01.05.2020, 11:20
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Re: Mortgage advaice required

As I want to be mortgage free in 10 years, I would pay down the capital.
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Old 01.05.2020, 11:42
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Re: Mortgage advaice required

I think it depends a bit on your situation, and what else you might do with the money. I believe that the important thing is to think through what happens if rates go up, and if rates go down.

For example, if you are confident that you would have the liquidity to pay off the loan early, then there is a strong argument for just running with a floater. (Speaking in general terms - I don't know anything the subvention policies.) This minimizes your current payments, and if the capital ever becomes too expensive, (rates go up too much) you can pay it off without penalty.

A 10 year interest-only loan makes sense if you believe that you can do better than a 1% return on whatever additional capital you do have, over the next 10 years. It also maximizes the effective benefit to you if rates do go up - you could be paying 1% for a large loan in a world with bank accounts that pay 5%. On the other hand, especially in the uprate scenario, you need the discipline to be ready when the balloon payment comes due. This could mean building up the liquidity to pay down the loan, or a willingness to accept a sale of the property at a real loss, or a confidence that your income will be high enough (e.g. by tracking inflation) to afford a higher interest rate.

Moving on to the amortizing loan, of course you pay less interest in total. This is better in the low rate scenario, though not as good as a floater. Unlike a floater, it still limits your exposure to rates increasing. It also forces a (hopefully) reasonable schedule of setting aside money to pay down the mortgage. On the other hand, it is otherwise worse in the uprate scenario, as your undermarket loan is smaller.

Roughly speaking, a floater and an interest-only mortgage are extremes. The first is best economically if rates stay low, the last if they go up. Amortizing lies in between the two. (If you want to really dig into it, read up on bond duration and then think about the duration of the bond that you want to sell to the bank.)
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Old 01.05.2020, 11:45
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Re: Mortgage advaice required

Paying 5801,10 extra euro in interest over a 10 year period allows a lot of flexibility and the option of buying all the furniture I need immediately, plus cash is available for any emergencies that crop up. The mortgage has to be fully paid back after 10 years in both cases.
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Old 01.05.2020, 11:49
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Re: Mortgage advaice required

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I believe that the important thing is to think through what happens if rates go up, and if rates go down.
The interest is fixed at 0,95 for the ten year period of the mortgage. The loan cannot be paid off early.



I don't know if I can get a better return than 1% but the extra 5081 euro over ten years would give me a lot of peace of mind. It is also a quality of life decision, not just financial.
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Old 01.05.2020, 12:03
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Re: Mortgage advaice required

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The interest is fixed at 0,95 for the ten year period of the mortgage. The loan cannot be paid off early.



I don't know if I can get a better return than 1% but the extra 5081 euro over ten years would give me a lot of peace of mind. It is also a quality of life decision, not just financial.
I'd go interest only and invest. Depends on your risk appetite and situation in life.
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Old 01.05.2020, 16:07
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Re: Mortgage advaice required

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The interest is fixed at 0,95 for the ten year period of the mortgage. The loan cannot be paid off early.



I don't know if I can get a better return than 1% but the extra 5081 euro over ten years would give me a lot of peace of mind. It is also a quality of life decision, not just financial.
I think you have already answered your own question. The money difference is tiny but it also depends if you plan to save cash or spend it all.
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Old 01.05.2020, 17:05
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Re: Mortgage advaice required

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I think you have already answered your own question. The money difference is tiny but it also depends if you plan to save cash or spend it all.
Well I must save 102000 over ten years to be able to pay back the mortgage. Paying it back at once means I am not tied to a fixed schedule of payments. At the moment it is the option that I am favor but I am interested in hearing opposing arguments.
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Old 01.05.2020, 22:34
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Re: Mortgage advaice required

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Well I must save 102000 over ten years to be able to pay back the mortgage. Paying it back at once means I am not tied to a fixed schedule of payments. At the moment it is the option that I am favor but I am interested in hearing opposing arguments.
You can opt for a middle ground and amortise part of it and pay off the remainder at the end.

I had a similar thought process. With negative rates, there's a good argument to stash part of your cash into a guaranteed ~1% CHF return and hold part for reserves for flexibility. You don't say how much reserves you have already. If you want a guaranteed CHF return, you would currently have negative interest, so it isn't as bad as it seems.

Looking at it another way: let's say you have 102k now cash in hand. And you have to pay back 102k in 10 years. There's also a lot between now and then that could go wrong where you lose all or some of that 102k, but still have to pay up in 10 years. e.g. hold in cash, theft risk, fire risk. Put in bank, negative interest rates, bail-in risk. Invest in bonds, lose money due to negative rates, put in stock market potentially lose money.
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Old 02.05.2020, 07:01
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Re: Mortgage advaice required

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I'd go interest only and invest. Depends on your risk appetite and situation in life.
This would be my preferred route too. Cash is king. At these prices, it is worth keeping the control as long as possible.
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Old 02.05.2020, 08:07
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Re: Mortgage advaice required

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I had a similar thought process. With negative rates, there's a good argument to stash part of your cash into a guaranteed ~1% CHF return and hold part for reserves for flexibility. You don't say how much reserves you have already. If you want a guaranteed CHF return, you would currently have negative interest, so it isn't as bad as it
Where can you get a guaranteed 1% return CHF return, over what term, what’s the credit rating of the institution and what’s the maximum deposit? Easy arbitrage opportunity.
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Old 02.05.2020, 16:06
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Re: Mortgage advaice required

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You can opt for a middle ground and amortise part of it and pay off the remainder at the end.

I had a similar thought process. With negative rates, there's a good argument to stash part of your cash into a guaranteed ~1% CHF return and hold part for reserves for flexibility. You don't say how much reserves you have already. If you want a guaranteed CHF return, you would currently have negative interest, so it isn't as bad as it seems.

Looking at it another way: let's say you have 102k now cash in hand. And you have to pay back 102k in 10 years. There's also a lot between now and then that could go wrong where you lose all or some of that 102k, but still have to pay up in 10 years. e.g. hold in cash, theft risk, fire risk. Put in bank, negative interest rates, bail-in risk. Invest in bonds, lose money due to negative rates, put in stock market potentially lose money.
yes, paying off part of the mortgage and then paying a lump sum after 10 years is an option.
With all costs included I am paying 250,000 euro for the property. I will borrow 120,000 euro and provide the remaining 130,000 euro from savings, leaving me with 110,000 euro savings left.
I could of course borrow a lot less but as I am getting a 15% "discount" on the mortgage I want to take full advantage of that.
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Old 02.05.2020, 23:59
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Re: Mortgage advaice required

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Where can you get a guaranteed 1% return CHF return, over what term, what’s the credit rating of the institution and what’s the maximum deposit? Easy arbitrage opportunity.
paying off your 1% mortgage is your guaranteed 1% return...
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