I often get asked which of the two or three or four options to choose when to take a home loan.
Alexander has now received three offers from the same bank for the same 15-year loan:
– 3.68% interest, but interest is recalculated annually.
– 4.87% interest, here will be a new interest rate every three years.
– 5.37% interest, payable every five years.
Wants to know which one she thinks would work best
Let me start with a little explanation: for new loans, there is a floating base rate that is linked to, say, the Good Finance Offered Rate (BUBOR) and comes with a fixed premium. (The interest rate may be linked to something else, such as the yield on five-year Hungarian government securities.)
If all three loans are linked to the 3-month BUBOR, the rate is now 1.5%, which changes and is fixed at 2.18 for the first loan. %, 3.37% for the second and so on.
And your monthly installment changes every year, every three years or every five years, following the change in BUBOR. As much as the BUBOR plus the fixed premium at the time of interest rate change, the interest rate will be the next 1-3-5 years.
How volatile is this Good Finance interest rate?
Taking some examples from the last 10 years: the current 1.5% BUBOR was still 2.1% at the beginning of the year, 2.99% at the beginning of last year, 7.24% at the beginning of 2012, and 9.94 at the beginning of 2009 %, At the beginning of 2005 9.33%.
The loan amount is HUF 10 million, the maturity is 15 years and the interest margin is 2.18% per annum.
If the BUBOR is 1.5%, your interest on the loan is 3.68%: monthly repayment is 72.375 Ft, all payable during the term is 13.027.582 Ft.
If the BUBOR is 2.99%, then your interest rate on the loan is 5.17%: monthly repayment is HUF 79,967, total payable is HUF 14,394,195
If BUBOR is 7.24%, the interest on your loan is 9.42%: $ 103,940, all payable is $ 18,709,250.
If the BUBOR is 9.94%, then the interest rate on your loan is 12.12%: monthly repayment is HUF 120,789, total repayable amount is HUF 21,742,184
As you can see, a 66% monthly installment increase is included in the deck without fail if BUBOR rises above 9% again. (Of course, it does not matter when interest rates rise, when you have $ 9.95 million in debt or only 1 million, but you can see the differences in the monthly installment using the values of recent years.)
Since there is a 10-year fixed rate loan on the market for 4.99%
(I wrote about it here: 10-year fixed rate), ask the question that the annual interest rate is 1.32 percentage points higher ($ 79.327 instead of $ 72.375, years fixed) is it worth it if you are not exposed to interest rate risk?
Is the Good Finance interest rate expected to rise by 1.3 percentage points at any time in the next 10 years?
Even within a year? (One and a half years ago, the rate of BUBOR was 1.49 percentage points higher.)
If so, you can even run up to 8-9% on the BUBOR rate, then no matter which one you choose.
(The only downside to a 4.99% ten year fixed loan is that the maturity can be no more than 10 years. In my opinion, if you take out so much credit that you can’t pay it off comfortably at a large margin, then you took out a loan.)
In response to Alexander’s question: I think it is better to choose a more expensive but safer long-term loan, unless you want to pay off the loan anyway in 2-3 years, for example, by selling a property or expiring your savings savings.
However, if interest rates do not rise in the following years or decades (which I do not consider very likely), consider that monthly plus $ 6,700 insurance against interest rate changes.