Advice fixed-rate period savings mortgage

Hi all,

I am a complete novice when it comes to mortgages and would like some advice.

We have a mortgage that consists of part savings and part interest-only. The fixed-rate period (10 years) of the savings mortgage ends on March 1, 2019. We received an offer for 10 years fixed at an interest rate of 2.1%. This reduces our monthly costs by 182 euros. At first we were very happy with this, because who wouldn't want lower monthly
payments. But now I'm reading around here and I understand that we shouldn't be so happy with the lower interest rate at all, but better for a higher can choose interest.

Now I have come up with three options myself:
1. we "just" agree with the proposal and fix the interest for 10 years.
2. we are going for a fixed interest period of 20 years at 2.990% interest. I just have no idea how to calculate how high the savings amount will be. The interest amount then goes up slightly compared to a 10-year fixed, but the savings part goes down, so I don't think we're going to sit far from that 182 euro difference. And the tax deduction will be slightly higher. Or am I making a mistake in this?
3. we fix the interest for 3 years at 1.6% interest.

Why 3 years? We are working very hard to pay off the interest-only part. If our financial situation does not change, we will need a maximum of 3 years to fully repay this. I thought it might be a good idea at that time to see if we can do something else with the savings Equity mortgage. We now have NHG and the term life premium is also based on the full mortgage amount. I understand that this premium does not go down when extra repayments are made. When we get rid of the interest-only part, the mortgage is so low that NHG is not necessary and neither is the death risk. And certainly not if we put the saved part in the mortgage and convert it to, for example, linear.
On the other hand , I also think that any transfer or conversion to another mortgage type will entail costs . Plus that three years at 1.6% is not favorable either. Then we might just as well take the NHG and death risk for granted?

I am very curious about your opinion

I don't know that I understand what a savings mortgage is.

However, from my debt free stand point you take the shortest possible mortgage you can. Always fixed rate. In America that usually means choosing a 15 year mortgage over a 30 year.

Also, in America the tax deduction is nothing. Owing nothing far outweighs any tax deduction you might get.

eva arya wrote:Hi all,

I am a complete novice when it comes to mortgages and would like some advice.



I am very curious about your opinion

Hello Eva and welcome!

The best advice I can give you is pay a small fee to an accountant to explain the loan you have, in terms of money over the life of the loan and give you options.  The fee will pay for itself in not making an expensive mistake over the life of the loan.  I don't mean to sound glib.  It sounds like the loan you have is complex and may contain devils in the details.  A professional will give you sound financial advise.

I have several thoughts on what you wrote and want to share but since hospitalization with Covid, I don't communicate in writing (typing) so well.  I am getting better on a keyboard each week, so hopefully this may make some sense:

Elle gave you the best advice.  Always fix rate/  shortest length, even if the payments make a tight budget.  

It sounds like your interest only savings loan is a product you were sold to encourage home ownership in the future.  However, it sounds like you are paying them 2.1% to borrow your own money.  Not a great deal for you.  In the states we have these as well.  The borrower pays interest only, so does not own the asset at the end of the loan.  However they can sell the asset at any time.  People take these to control an asset in hopes that the asset will appreciate in value at a faster rate than the interest accrues.  However if they don't 'flip it', even at the end of the loan, they have in effect only leased the asset.  They walk away with nothing, but the (hopefully) some equity.

Think of leasing a car.  You pay users fees on the front end and the back end, make a higher monthly payment (sometimes at interest) and at the end, you still don't own a car.  For the same money spent you could have controlled the asset (car) for the time, not paid someone else for depreciation, and and Own the car at the end of the term.  Perhaps the lease company charged a little more each month and set some of it aside for a down payment on a new car to give you at the end of the lease.  You could have put the same money in savings each month and EARNED interest, rather than paying interest to them.    It sounds bad in those terms, but often that is the net effect of some of these financial products sold to consumers, especially first time home buyers.  

Get on a level playing field.  Go pay someone a few hundred Euros to read the contracts and do the maths; and give you your options in plain language.  The money spent will be worth it, as will the peace of mind.

I think you will be shocked at the difference of total pay out between option 1 and 3.  Option 2 is far too detailed (not enough information) to advise on that.  As a general rule the more complex the language, the less it plays in your favor is my experience.

In summary, it sounds like with the information  are able to share on a complex contract you are on the right track paying off the interest only portion and dropping the insurance coverage premium.  Option 1 and 2 sounds like they will compound over a number of years unnecessarily, costing you thousands more over the life of the loan.  However, I strongly advise sitting down with an accountant and having him run the numbers.  It is well worth the fee.  

Welcome and wish you well on your decision.  I am sorry I could not be more clear or helpfull, but without the details of the contracts/offers, I can only say take the shortest period (even at a slightly higher rate.), especially if it will allow you to drop the insurance premium.

Check out the various interest tables available on the net.  See how much of each payment will go toward interest and principle.  When I got out of school I was offered a 30 year loan on a house with a very low down payment. I ran the interest by hand ( long before the internet) and realized that for many years just about all my payments would be going into interest.  I walked on the offer. Later I bumped into the VP of a bank who gave me advice that I have used the rest of my life.   Put 20% down.  If I can’t afford 2o% down, I can’t afford the house.  Fixed rate mortgage.  10 years max.    

Since then I have added more conditions.   I make my first payment on the day I take the loan out. I pay 1/2 of the monthly payment every 2 weeks.  This schedule greatly reduces the interest I pay in for the term of the loan.

Both Jack and John have given good advice.
I have had many mortgages with my life, another trick is that I always pay a bit extra even $5 each payment.
By paying every two weeks you actually pay an additional months payments, usually with not noticing.
Another plan I heard was to write down each time you were tempted to buy a coffee, see a film etc and not do so, and then put that cash saved on another payment.
Its amazing how it knocks down the debt.

Do not be afraid of good debt.

I realize this thread is already 6 months old and the OP probably already made whatever choice was needed at that time.  I am unclear about what all the debts actually were (savings loan?) but for whatever it is worth, my thought is that a 10 year loan at 2.1% fixed is pretty good.  The Federal Reserve is about to raise interest rates so borrowing will shortly become more expensive (interest rates are at about rock bottom right now).

As John already pointed out, paying the principal off early is a great way to reduce the overall cost of the loan.  I agree with Elle that having no loan is best but sometimes one just does not have the money when the opportunity is there.  One downside to saving (though I am a dyed-in-the-wool saver) is that if the price of the house (or whatever) raises faster than one can save then saving becomes more expensive than borrowing.  Just food for thought.

Eric