In the financial media, you can currently read that the bank economists recommend repayment of mortgages with both 2.5% and 3% in interest rates.
Repayment of 2% loans
We also recommend that you get ready for repayment of 2% loans if they are based on bonds maturing in 2047. These are loans that have been paid out in the period 2015-2017.
But why does the Good Finance go further than the bank economists? We do this because Good Finance not only looks at the individual loan restructuring, but also looks forward to the future restructuring, and here is the situation that it is better to have a 1.5% loan than a 2% loan. The reason for this is that the bonds with maturity in 2047 will become less and less price sensitive than the new bonds with lower interest rates, so you will be able to gain more from converting now, and then later converting into interest again.
We will show this with some examples, which are based on the rates on 15.2.2019 and that 3 years ago you took out a 2% loan of DKK 3 million.
Example 1 shows the result of retaining your current 2% 2047 loan for 2 years, assuming that the interest rate is now 3%:
- The debt is today (27 years back) DKK 2,774,000.
- The net benefit is approx. 10,900 kr. month.
- In 2 years, it will be rescheduled to 3% and the debt has fallen to DKK 2,616,000.
- The redemption price is 95 and you must take out a new 25-year loan of DKK 2,520,000.
- Net performance increases to approx. 11,000 kr. month
- In another two years the interest rate has again dropped to 2%, and you need to raise a new 23-year loan of DKK 2,445,000.
- The net benefit falls to approx. 10,000 kr. month
So after 4 years you have a 2% loan of 2,445,000 with a net benefit of approx. 10,000 kr. month.
Example 2 shows conversion to 1.5% now and then perform the same conversion to 3% as in Example 1.
- Starting debt will be DKK 2,900,000 (+126,000)
- Net performance is still approx. 10,900 kr. month.
- In 2 years, it will be rescheduled to 3% and the debt has fallen to DKK 2,723,000.
- The redemption price is 88 and you must take out a new 25-year loan of DKK 2,430,000.
- Net performance increases to approx. 9,600 kr. month
- In another two years, the interest rate has again dropped to 2% and you need to raise a new 23-year loan of DKK 2,359,000.
- Net performance is still approx. 9,600 kr. month
The difference is that the debt is DKK 86,000 lower and the net benefit DKK 400 lower if you first convert to 1.5% interest.
If you took out a 2% loan 2047 with interest free of 3 million 2 years ago.
Then there is no traditional conversion option to 1.5% yet, but you can choose to convert to interest-free by using the Good Finance model.
Here you will get an extra benefit if your contribution rate drops. First, we will show an example that shows your traditional conversion options:
- The debt is still DKK 3 million.
- The net benefit is approx. 5,400 kr. month.
- In 2 years, it will be converted to 3% and the debt is still DKK 3 million.
- The redemption price is 93.75 and you need to raise a new loan of DKK 2,849,000.
- Net performance increases to approx. 6,800 kr. month
- In another two years, the interest rate has again dropped to 2% and you need to raise a new loan of DKK 2,923,000.
- The net benefit will be approx. 5,200 kr. month
The result of the two adjustments is that the debt has decreased by DKK 77,000 and the net benefit has decreased by DKK 200 per share. month.
If you use the RealWare model instead, you can already convert to 1.5% and then complete the conversions. We show this here:
- The current debt is DKK 3 million.
- The net benefit is approx. 5,400 kr. month.
- The 2% loan is rescheduled to 1.5 5 with the Good Finance model
- The new debt will be DKK 3,136,000 (+136,000)
- Net performance is still approx. 5,400 kr. month.
- In two years, the interest rate has risen to 3% and the debt has fallen to DKK 3,110,000.
- This is because you are using the contribution savings for installments
- The redemption price is 88 * and you must apply for a new loan of DKK 2,789,000.
- Your net benefit increases to approx. 6,200 kr. month
- In another two years the interest rate has again dropped to 2% and you are converting to a new loan of DKK 2,890,000.
- The net benefit will be approx. 4,500 kr. month.
* Only the mortgage loan is repaid at rate 88. The mortgage is repaid at rate 100.
The difference is that the debt is DKK 33,000 lower and the net benefit DKK 700 lower if you first convert to 1.5% interest using the Good Finance model
Comments on the calculations
The timing of repayment of the 2% loans is not optimal. In fact, it can hardly get any worse than now. This is because differential interest must be paid right up to 1.7.2019, ie for more than 4 months. If the debt is DKK 3 million, the expense will fall by approx. 259 kroner a day. The differential rates per today is included in the calculations. So you can save on redemption costs by waiting to complete the rescheduling, but then price changes must be taken into account.
If the rates rise , the result will be better, because the new loan will be smaller and the repayment at the same time will be cheaper. An increase of 1 point means you have to borrow 10,000 less per month. million in debt.
If the prices fall, the result is generally worse. You have to borrow 10,000 kroner more per million in debt if the rate drops by 1 point.
But if you use the Good Finance model, the result can be better. This is because in that case you can base the conversion on 1.5% for 20 years. Here the price is currently 101.20, but if the price falls to e.g. 99.75, it is a far better rate than the current 1.5% 30 year rate used in the calculations (97.55).
In that case, you have to borrow DKK 22,000 less per month. million in debt, and because you use the Good Finance model, you can choose to repay over 30 years or opt for full repayment because the repayments are regulated over a mortgage with the same interest rate as on the mortgage.
Preparations must be started now
It is important to be ready for conversion when the exchange rate is just right and the prerequisite is that you have a loan offer. Therefore, the first step is to book a loan offer at the mortgage institution.
And if you have to change mortgage institution at the same time, you also need to be credit approved and the property must be assessed. It sounds awkward, but since the loans we have been counting on may have been disbursed 3-4 years ago, there is a high probability that the property value has increased and you can therefore get a lower contribution rate at the same time. You do not automatically get this when you change loans in the current mortgage institution, but when changing institutions, a new assessment must always be made, and then the contribution rate is based on the new assessment.