Borrowers often choose a high credit rate to pay off the debt as quickly as possible. Is it good? No. Why not and how to do it better can be found in this article.
3 reasons why a high credit card is not optimal for real estate financing and can even break your financial “neck”:
- If the credit rate is too high, you have little financial leeway per month. If something unforeseen intervenes – such as a major car repair or uninsured damage to the house – it can financially drive you very tight.
If, for example, you slip into the overdraft facility of your checking account or have to take out an additional installment loan just to pay the rate for your real estate financing, this will be quite expensive for you, because both interest rates are significantly above the average lending rate for real estate.
However, you won’t have much left if the monthly rate has been agreed too high. Once a loan contract has been signed, it can hardly be changed and that will bring you sleepless nights. That shouldn’t be in your own four walls!
- If you put all of your available money into paying off the house or condo, you paid them off faster than others. That’s right. But what do you have after 25 to 35 years? A property that needs renovation. And what do you need for it? Right, a new loan, because you couldn’t save anything on the side because the loan rate was so high.
In addition, a home renovation loan is likely to become more expensive (higher interest rate) than real estate finance.
- You get cheap real estate financing mostly 3–4 percentage points above the current base rate of the European Central Bank. Very good investment funds have demonstrably been able to generate a significantly higher return over the past decades.
What should I do?
Take out real estate financing that gives you enough leeway for the unpredictable and allows you to regularly save money on a wealth building plan.
In concrete terms, this means that if you can afford a real estate loan with an initial repayment of 4 percent, then you agree 2 percent with the bank. If your monthly budget is only enough for an initial repayment of 2 percent, then agree on 1 percent.
With the difference, you first build up a financial reserve, if it does not already exist, or create a new one if your previous reserve was spent on property purchase. A call money account is suitable for this. Interest rates are low here, but you can get your money immediately without any costs or fluctuations in value.
You use this account to pay for financial emergencies (car repair, for example). An amount of at least three usual monthly expenses is recommended. If you have withdrawn money, you should replenish the reserve as soon as possible.
It is also advisable to create a long-term stock savings plan. If this topic is new to you, inform yourself about the selection of very good fund savings plans (no insurance! – too little return, too high costs).
Over a period of 25 to 35 years, analogous to your real estate financing, you can enter into international equity investments from a security perspective. There is a lot of time to balance highs and lows. Financial scientists have proven that stocks generate very good returns in the long term.
What will your wealth look like after 25–35 years?
In the first variant, you paid off your property. Your account balance is “zero”. Zero means nothing, no savings. For this you have a house or apartment in need of renovation. New borrowing threatens. In addition, you should have had problems in the meantime to service your installments, because with such a long term something always comes up!
In the second variant, your debts have not yet been completely paid off. In return, you have a sizeable securities account that far exceeds the level of your debts, because the performance over the long period was much better than the interest saved.
On top of that, you still have a few thousand euros in the overnight deposit account. From the overnight money interest and a few dividend payments, you can afford a great banquet at least once a year and look forward to your property purchase.
This variant also had “financial incidents”, but your call money account allowed you a solution without expensive additional borrowing. In the following months you replenished this reserve account.
Note: Never agree on credit rates that are too high. Instead, create a reserve account and start an asset accumulation program with selected shares or equity funds with the difference between the possible and actual loan rate.