Interest rates on mortgage loans have reached historic lows this year, and many people have used this option. Some have taken a new mortgage for housing, others have just refinanced the old one and exchanged more expensive loans for cheaper.
They used low rates and saved hundreds of thousands of euros. It is hard to find the negative. It is quite simple. Lower interest = lower repayment = lower overpayment.
However, the state of record low-interest rates may not last forever and therefore need to be for the future. What can be expected in the event of interest rate is read in my next article.
Why are interest rates so low?
In particular, the policy of the European Central Bank is loosening behind this extra-low rate, which, by cutting interest rates to a minimum, seeks to stimulate economic growth in the European Union. This also affected Slovakia, where interest rates fell significantly. As you can see in the picture below, they were even more advantageous than in Austria and only 0.01% behind Germany.
New cards in the game, however, also distributed the law on housing loans of 21 March this year. This caused the prepayment to be at a maximum of 1% as opposed to the original 5%.
The aforementioned factors supported the impact of the competitive environment and the banks started to overtake in their mortgage campaigns to maintain or increase their market share.
However, banks have begun to cut income as a result of low-interest rates, which may have a greater impact on bank clients, ie all of us. Where a person gets, the bank must lose and vice versa. It is logical and this is the case here.
How can banks compensate for losses?
The current situation of cheap mortgage loans for housing may lead to increases in the future. Banks are likely to offset their decline in profits. Despite increased competition in the banking market, they will, therefore, be forced to include losses primarily in interest rates and other service charges.
The danger of low-interest rates
Low-interest rate means cheap credit and it means cheaper housing. It is very positive that people now have the opportunity to borrow for their housing at such low-interest rates. Without much money.
But what happens if interest rates increase? How will their payment change?
For better imagination, I give an example of what may happen in the future in raising interest rates.
|Loan Amount:||€ 70,000|
|Loan Maturity:||30 years|
|Interest rate:||1.5% for 3 years fixation|
|Monthly installment amount:||€ 241.58|
Mortgage loan balance after three years repayment – € 64,329.89 for fixation anniversary.
As you can see in the table, despite the fact that the loan balance is almost € 6,000 lower, the increased interest rate with a shorter maturity of three years may mean an increase in installments of 20 to 50 percent.
The saving of funds, which is due to the low-interest rate, must therefore be seen as a space for creating reserves, medium- and long-term investments.
You can later use the money saved for a one-time deposit that will reduce your future repayment, or you can save on the early repayment of your entire mortgage.
Of course, no one can force you to postpone money and take the time to pay more due to lower repayments. However, my aim is to point out that this situation may not last forever and it is good to be prepared for every situation.
How to protect yourself from rising interest rates?
Unfortunately, nobody just avoids raising interest rates. But what you can do is prepare yourself and delay the difference between higher and lower installments. You can store more than the difference or less. It’s up to you
However, it is important to start postponing at least something. This will create a reserve that you can use to raise interest rates in the future. Own savings can be good protection.
Of course, you can not expect such an appreciation today on your current account today. To earn more, you need to reach for other products. Of course, putting your money on your current account is better than spending it all, you have it quickly and whenever you need it. On the current account, however, they lose money in value. To maintain the value of your money, it is important to earn at least inflation. However, it is best if you significantly outperform inflation.