For years, the profession has been arguing that, for loans that are strategically linked to the loan, prepayment every 4 years is more profitable, or we can fund a 10-year housing contract in the hope that we can build the most stable construction possible (housing savings beside the loan)? The issue was absolutely justified in 2018, as the possibility of reducing state support for housing savings contracts is becoming more realistic nowadays, and the debate on changing interest rate versus long-term fixed interest rates is becoming increasingly acute. In this article, we are looking for an answer – guided by a model example – in which direction you should go and what risks you have to take in return!
The future of housing savings
Before we begin with the essence of the article (n), it is worth looking at the current and future situation of housing savings in Hungary. In short, the proportion of state aid in these contracts (30%) is by far the highest in Hungary than in the case of our regional neighbors. For example, the Austrians receive 1.5% state aid, but almost all (then 60% market coverage, but just over 15%) have this type of contract. We wouldn’t be surprised if they simply changed the terms of the housing savings.
Most likely modification suggestion:
- Support would be 20% instead of 30%, which would still be the highest in the region
- instead of 20,000 forints per month, you should set aside $ 30,000 for a maximum of $ 72,000
Take a floating rate loan or fix?
There are two important reasons why we cannot be smarter than the bank at variable interest rates:
- By the time we get to change the interest period in the loan agreement, the bank raised the interest by then. In addition, you get a free hand for a market loan. As a solution, we can consider a type of credit redemption (but it has hundreds of thousands of costs) with qualified consumer credit. But it should not be forgotten that in this case we can fix a higher priced interest.
- If interest rates rise, it always means a reduction in lending. If lending is reduced, less property is bought. As a result, we can witness a significant drop in prices or we may not find a buyer for months because our demand for solvency is becoming narrower.
A specific calculation
Based on the static example, the interest rate on the floating rate loan will remain in the next 4 years (2.23%). I then examined how the repayment of the floating rate loan and the total repayment are relative to the 10-year fixed rate qualified consumer friendly loan, if in the worst case the interest rate would be 8% in the last 6 years in case of variable interest (5%) rise in interest rates).
We can see that a 5% interest rate change from the fifth year would result in a 41% increase in our original repayment installment (variable interest rate), whereas this increase would be 10.2% compared to the initially higher fixed rate repayment. The equilibrium state, when we pay exactly the same amount, is 7.55% interest rate after 4 years for our floating rate loan.
In this example, our ultimate conclusion is that we can imagine a situation where, over the next 10 years, our variable interest rate will be higher than 7.55%?
Every 4 years or every 10 years, do we need to clean up our house loan?
Prepayment is always free of charge for a homeowner, as we assume you choose a Qualified Consumer Friendly Home loan
In the example, we expect a 4% interest rate, but it is very important to note that the interest rate of a ten-year fixed home loan (good real estate, high income) is 4.25% and the average is 4.6%, but 5 Interest rates of around 2.4% are now available. And if we give our head to changing interest rates, we can achieve interest rates of around 2.1% under similar conditions. In this case, however, there is a strong chance that the MNB will raise the central bank base rate in the coming years (they will warn 3% increase within 10 years) and drastically fluctuate our floating interest rate, even over 5%.
A 1% interest rate change for a HUF 15,000,000 loan (4% interest rate, 30-year maturity) means a monthly repayment increase of HUF 8,500. This means HUF 102,000 in one year and HUF 10m in 10 years.
In the case of a 2% interest rate change, the same loan will increase with a monthly repayment amount of HUF 17,000; in 10 years the difference would be HUF 2M.
We have to think very much about choosing a floating interest rate or a fixed rate loan!
1. Model (4-year LTP)
360 Snow – (Current Capital Debt): $ 15,000,000
To be paid to the Bank: HUF 71,612 / Snow (50 months)
4 LTP: 80.600 HUF (48 months) (4x 20,000 HUF deposit + 4 × 150 HUF administration fee)
Account opening fee for 4 LTPs: 4x 28,000 = HUF 112,000
Total: 152.212 (71 612 + 80 600) x 48 + 71.612 x 2 = $ 7,449,400
Note: Housing deposit allocation is 2 months, so two months after the 48th month, we still have to pay the normal installment to the bank before we prepay free of charge.
Current Capital Debt: 13.826.238 – (1.250.496 Ft x 4) = $ 8,824
New installment to the bank: 45 705 HUF / month
360 – 50 = 310 Snow – (current capital debt): $ 8,824.254
To be paid to the Bank: HUF 45,705 / Snow (50 months)
5 LTP (4x20e + 5e): $ 105.900 (48 months)
Account opening fee for 5 LTPs: 5x 28,000 + 7,000 = 147,000 HUF
Note: The complete construction may fail if, after 4 years, we do not have 5 “free tax numbers” for which we can make new home savings!
Total: 151.605 x 48 + 45.705 x 2 = $ 7.368.450
Current Capital Change: 7.939.513 – (1.250.496 Ft x 5 + 312.638) = 1.374.395 Ft
310 – 50 = 260 Snow – (current principal debt): 1.374.395 Ft
To be paid to Bank: HUF 7,912 / Snow (50 months)
1 pcs LTP: 20.150 Ft (48 months)
Account opening fee of 1 LTP: HUF 28,000
Total: 28.062 x 48 + 7.912 x 2 = $ 1,362,800
Capital Debt: 1.193.513 – (1.250.496 Ft) = -56.983 Ft
What’s This Total:
7 449 400 + 7 368 450 + 1 362 800 = 16 180 650 Ft – 56 983 (LTP overpayment) = HUF 16 123
+ account opening costs for LTP
16 123 667 + 287 000 = 16 410 667 forints
Model 2 (with 10-year LTP)
360 Snow – (Current Capital Debt): $ 15,000,000
To be paid to Bank: HUF 71,612 / Snow (up to 122 months)
4 LTPs: 75.600 Ft (for 120 months) (3x 20,000 + 1x 15,000 + 4×150 fort administrative fees)
4 pcs LTP account opening fee: 75,000 HUF (in action, otherwise 3x 76,000 HUF + 1x 57,000 HUF = 285,000, – instead)
Total: 147.212 x 120 + 71.612 x 2 = $ 17.655.440
Capital Debt: 11,753,046 – (3.135.630 Ft x 3 + $ 1,351,762) = -5,606 Ft
What’s This Total:
HUF 17,655.440 – HUF 5,606 (remaining amount after prepayment) = HUF 17,649,834
- Opening fees: $ 75,000