With their repayment, you run into the repayment trap if the repayment is one percent in a low-interest rate phase. That is definitely not enough! You run 100% into the repayment trap of the banks.
One percent repayment, with low building interest, is very dangerous! You’d think that this is a dubious loan. The cause is the principle of the annuity.
The higher the interest rate, the higher the repayment component and the faster the building loan is paid. The same applies, the lower the construction interest, the lower the repayment component and the longer you pay off your construction loan. This is also called the runtime effect.
Building loan tip repayment and the repayment trap
What is behind the runtime effect? With an annuity loan, the remaining debt decreases with every loan installment paid. As the credit term increases, the interest component decreases. The remaining construction loan debt is reduced by the interest portion.
At the same time, the repayment share increases. The credit rate remains the same. The increase in the interest component depends on the interest already paid.
If a building loan has high-interest rates, the repayment portion increases faster. This means that the lower the building rate, the slower the repayment portion of the loan installment increases. At first glance, this sounds a bit complicated.
Banks sense the big deal
Despite all warnings, banks sell their financing with only one percent repayment. Not entirely unselfish. The bank earns significantly more money through a long term and low repayment. In addition, the bank speculates after the end of the fixed interest rate, with attractive follow-up financing. The customer is usually easily enthusiastic about it. After all, the monthly loan rates are very moderate.
But the customer often falls by the wayside with such a building loan. Since the debt is reduced only minimally, the client takes immense risks. Builders usually pay their building loans into old age. After the first ten years, the remaining debt is usually 90 percent of the original loan amount.
Our example also made the following clear: If interest rates rise from 3 to 6%, this means that the monthly loan rate will almost double. Many builders usually have no financial reserves to absorb an increase in building interest. If the repayment is assumed to be 3%, the builder has the option of reducing his repayment. However, only up to max. 1 percent. In this way, he can largely compensate for any rising interest rates. With a 1% repayment, there is no scope for a reduction in the repayment.
Stay away from a building loan that provides for 1 percent repayment
You should start with at least 2 percent repayment. Let the bank also calculate how your loan rate will develop if interest rates rise by 2 or 3 percent. If you cannot pay this building interest, choose a longer fixed interest rate. Even if this is a little more expensive.
Make sure that you get a repayment plan from the bank. This shows when you paid your building loan. Your building loan should all be paid at the latest when you retire. In summary, this means that with repayment of min. Escape 2 percent of the redemption trap.