Should you take out interest-only loans? When is that a good solution
Is it a good idea to take out a mortgage-free loan? In some cases yes, in other cases no. Read on here and learn more about when repayable loans can pay off.
Should you buy new housing? Or do you just want to use the house value to finance a new car or boat? Either way, the mortgage or bank wants to help with the financing, but it’s not free. Besides, they want the money back again.
Or will they? For many years, all mortgage banks have offered loans that are interest-free. And this actually means that you can borrow for example a new bath without ever paying anything but the interest.
Admittedly, it is stated that mortgage-free loans in mortgage banks are only offered for a period of 10 years. But it is a smart thing to have the grace period extended in principle indefinitely. It simply requires the mortgage institution to say good every ten years to provide a new repayment period.
Short on interest-free loans
A mortgage-free loan is not a current loan per se, but in reality just a kind of superstructure on another. Whether you choose a fixed-rate loan, a flexible loan or one of the so-called guarantee loans, you have the option of choosing or not to pay the mortgage with all mortgage credit institutions. This also applies if you choose it in dollar or in euros. At most banks, you can choose whether you want the bank loan with or without interest-free loans. And this also applies whether you choose the bank loan with fixed or variable interest rates.
The choice is yours. But even though it sounds stressful to take the loan with a built-in break so that you can almost halve your monthly payment, you have to be skeptical. For about 20 or 30 years when a mortgage or bank loan for a new bath would normally be paid off, with a mortgage loan you would still owe the money away and pay interest on the debt.
It should be said that the interest-free loan can often be a very sensible disposition if you use the saved repayments wisely and not just burn the money on foreign trips and good red wine.
But in other cases, it definitely won’t make sense. The choice also depends on whether you have net debt (ie your total debt exceeds your total wealth) or net wealth (ie your total wealth exceeds your total debt). In the overview below you will therefore receive help with the choice.
Answer the questions with yes or no and see what the answer entails – and why.
Do you have debt?
Do you have other loans where you pay a higher interest rate than on a mortgage-free loan?
Solution: Choose a mortgage-free loan and use the saved installments to pay off more on the expensive financing.
Solution: In principle, the interest-free can not pay off.
Explanation: If you have many types of debt, first and foremost is to pay off the debt that has the highest interest rate. These are of course the most expensive, and the sooner you get them out of the world, the better. Therefore, if you can take out a cheap mortgage-free loan, the saved repayments can be used to pay off more on the high interest loan, which is therefore quickly obtained from the world.
If you have, for example, a consumer loan or a bank loan at 10% interest and can get a 3% repayment loan, it can be much better to pay off the cheap loan and pay off more on the debt with a 10% interest rate.
If, on the other hand, you pay less on interest on another debt than you can borrow on a mortgage-free loan, there is no idea in making it mortgage-free, to pay off more on the other debt. For example, many people have student debt. But (newer) student debt is imposed on such a low interest rate that it will never be possible to pay off a mortgage loan just to pay off more on the student debt. This is because the interest rate on the home loan will almost certainly be higher than the interest rate on the student loan.
Do you have wealth?
Can you earn a higher return on your assets than the interest you have to pay on the interest-free loan?
Solution: Choose a mortgage-free loan and use the saved repayments to invest more.
Solution: In principle, interest-free solutions cannot pay off.
Explanation: When you repay a co-operative housing or mortgage loan, you are actually saving up the housing, as the debt becomes smaller and the net worth (= wealth) thus greater. But it is not certain the home is the best place to place your wealth. The interest rate on mortgage loans is very low at the moment. And thus the interest rate on the savings you make in the home by paying off the debt is also very low. If you can get a higher return on your investments than the interest you pay on your mortgage, it would therefore be better to pay off the loan and pay the money on the investments instead. If you are good at raising money, then the mortgage will pay off.
If you pay top tax, you also get help with the investments of the tax system. For example, there are tax-advantaged pension schemes that involve a deduction of just over 51% of payments when paying top tax. And at the same time, the current return on the pension scheme is only taxed at 15%.
Since the right to deduct interest expenses is around 32% at the same time, it is in fact a pure money machine to make the repayable loan and use the saved repayments to pay on an annuity pension and buy the same securities in which the loan was taken up.
If you do not have the opportunity to make the most of a tax-advantaged pension scheme (for example, because you do not pay top tax), and if you are not good at raising money, the repayable loan is not a good idea. In that case, it would be better to pay off and thus save the house.