The question of property: Low borrowing rates are a dangerous temptation

High amounts of credit and a low repayment lead to enormous problems once interest rates rise again.

The low-interest rates for deposits and loans are a curse and a blessing. The yields on public bonds with a maturity of ten years, currently amount to about 2 percent per year. The cost of first mortgages is annually at 3 percent if the conditions for ten years to be agreed. Five years ago, the borrowing rate was 4.7 percent per year. The low lending rates are for individuals who want to realize in the coming weeks and months, the dream of homeownership, seductive in the truest sense of the word. However, the interest rate may not be the tip the scales. Simple as the payment of a home, so delicate is the financing if the borrowing is taken lightly. The difficulties become apparent in the following case.

A couple – he is 37 years old, she 35 years – has two children aged five and three years. The family wants to buy a house in the next few weeks. The building costs, including ancillary costs about 350,000 euros, and private citizens have 100,000 euros for a rainy day, so they need to take out a loan of 250,000 euros. The borrowing is not a problem in financial terms. The parents both work. He’s staff lawyer, they tenured teacher, and both buyers want to stay in employment in the future. The joint annual income is currently around 100,000 euros. Of these, approximately 65,000 euros remaining after deduction of social security taxes, so are about 5400 Euros available on average per month.

Combination of fixed loan and savings agreement

The first conversation with the bank has shown that the funding appears to be a problem. the Bank of the proposal consists of two components: the first mortgage is 150,000 euros, the annual nominal interest rate is 3 percent with a ten-year fixed interest rate. The repayment will be set at 1 percent. This makes the bottom line monthly 625 euros.

The second mortgage is a combination of a fixed loan and a savings agreement. The loan includes 100,000 euros and will cost per year is also 3 percent. In parallel, completed a building loan over 100,000 euros and each month be to part with 500 euros. Interest and savings rates lead to a monthly charge of 750 euros. It applies to the allotment of the savings agreement in eight years. After the allocation of building society loan, the fixed-rate mortgage is eliminated, and the building society loan will propose a monthly 600 euros.

Financing looks only at first glance sound

The two mortgage and building loan cost a total of 1,375 euros per month. That’s 25 percent of net income, and the stress seems acceptable for parents. The financing is solid but only at first glance. A sober analysis of things, there are multiple grounds for strong criticism. The investment is problematic in four points. First, this applies to the location of the property. Second, the repayment of the first mortgage is tricky. The festival loans and building savings are – this is the third point – a costly combination. And fourth, the question arises after secure financing if a parent should be unemployed or unable to work or even dies.