To all who have been attentive to our articles on credit housing I congratulate you as they have implemented our tips and recommendations are not now worried about potential interest rate hikes and most likely will make money.
True, there is no better strategy to anticipate possible increases in interest rates than to repay, preferably, 10 to 20% of the outstanding debt.
For example, take into account that you have a housing loan of 150,000 euros for 45 years at an interest rate ( euribor + spread ) of 2.25%. The current installment of the loan will be approximately 445 euros. If you amortize 20% of the capital, that is, 30,000 euros will have a reduction of 60 euros in the installment if all other elements remain.
A 2% change in the main index would lead the interest rate to 4.25% and the benefit would be approximately 625 euros if it had not made the early repayment and 540 euros if it had made the same. The advantage is that the increase will have less impact on the family budget.
Let us see that in 2010 a customer with housing credit under the aforementioned conditions decided to opt for the fixed rate by negotiating with the bank this possibility for a term of 5 years.
It is not that I advocate the fixed rate on housing credit because I believe that monitoring the market in the long run will bring more savings than setting the interest rate. However, I recognize that a fixed rate housing mortgage brings greater security to the customer.
On this topic I advise reading the articles on fixed or variable rate that although they are outdated have pertinent information that will help in the decision making.
- Fixed or Variable Rate on Mortgage? – Part I
- Fixed or Variable Rate on Mortgage? -Part II
- Fixed or Variable Rate on Housing Credit – Part III
However, we consider that in January 2010 it contracted a fixed-rate housing loan to 5 years. At the time, the swap rate for the same period was 2.61%, to which a spread of 1.25% would be added according to our example. If he had opted for the flat rate in just one year he would have incurred an additional 2,000 euros of interest on the variable rate option.
Now consider the following example for consecutive Euribor increases over the next few years to 2014.
As you can see, all customers who opted to set the interest rate in January 2010 will be bearing more than 7,000 euros of interest in relation to the variable rate option even considering a pessimistic scenario.
Due to this possibility of losing money with the fixed rate option, I advocate the variable rate with associated strategies for times of financial tightening, such as a request for spread reduction, early partial amortization or capital shortage.
I definitely do not believe that this strategy works given the existing economic instability and the rigidity of banks in lending.
Banks currently charge a premium for new contracts and are not willing to lower spreads below this premium, so there is no time for spreads to be reduced.
However, this time will come and then you can choose to request a spread reduction on your housing credit. A small reduction in the spread of our example, from 1.25% to 0.75% from the 3 year term means a saving of 19,000 euros.
Lack of Capital
It is a possibility, but extremely expensive for the customer. Requesting capital shortages does not solve the problem, it simply postpones the debt effort for the future.