Assets question: hat loans are an expensive affair

The low initial interest rate of some mortgage is an only optical illusion – and leads because of the fee for interest rate hedging in high overall cost. In this “risk”, the question arises what the customers of these loans still so fascinated.

The borrowing is a matter of for most individuals primarily interest. The lower the sentence, that’s the conventional wisdom, the cheaper is the loan. Against this background, it is no wonder that banks in many private citizens have with their “hat loans” easy game. Behind it hide mortgages with the low initial interest rate. The cost may continue to decline, and up they are by a hat – English Cap – limited, so that interest rates can not rise freely.

The loans are enjoying especially for top earners great popularity because the liabilities at its discretion, in case of doubt, can, therefore, be repaid on a hit and no cost. The advantages are of course doubtful because usually not the customer, but the bank wins. This is evident in the following example. A doctor needs about 200,000 euros for the reconstruction of his practice. The physician has the amount in the budget so that a credit is not necessary. He inquires of his bank about the conditions, and the bank makes Revered Doctor a tempting offer.

The initial nominal interest rate is 2 percent per year. It is variable, but it is capped for a fee. He may rise in the coming decade to no more than 5.5 percent per year. For that indeed a premium of 4 percent is due, but the interest rate hedging fee will be glossed over in the truest sense of the word. First, they should not be paid in cash, they say in the negotiations, and secondly, it is tax deductible.

The last point is particularly well at the doctor. Even otherwise, the physician in the “cones Credit” sees only advantages. The annual interest rate is low, the monthly burden low, the tax incentives are high, and the loan can be repaid in any form. What can go wrong? The answer is simple: compared to the alternatives of credit is quite expensive. But that only becomes apparent at a second glance.

The initial nominal interest rate of 2 percent per year is an optical illusion. Decisive is the one-time fee of 4 percent and the annual interest rate ceiling of 5.5 percent. Because the fee is not paid in cash but is packed on the mortgage, the loan is nothing but a loan at a discount and a duration of ten years.

The doctor has to go into debt with 208,333 euros. he will be paid 96 percent or 200,000 euros of this amount. The physician must be expected that the bank raised the nominal rate after a short grace period to 5.5 percent, and this rate is valid for ten years. In figures, this means that the credit will cost more than 6 percent, and this is compared to the alternatives that otherwise provides the capital market, an expensive pleasure. Normal loans with collateral security and ten-year fixed interest rate currently cost between 4 and 4.5 percent, so that the doctor is on the best way to get financially astray.

The odds start at the life of the loan. Because the interest on the loan is tax-related expenses, many top earners tend to pay off their debts slowly. They are animated by banks and brokers to put the repayment in alternative investments. Previously life insurance companies were all the rage, now fund policies offered. Against the austerity, agreements are no objection from the technical point, but whether they are suitable for debt repayment is questionable.

In this analysis, the term of the loan plays an important role. Loans are loans and eventually, the debt must be paid. Against this background, the recommendation of many financial advisers should be treated with caution, to let the debts are and to put the repayment in other investments. Loans and shares are not compatible, and the accumulation of debt is a game with fire.