Pay off or save credit

First of all: The best thing to do is to pay back your mortgage as quickly as possible. This way you pay less interest to the bank and you are debt-free again faster. The monthly installment consists of a repayment component and an interest component. The interest component is calculated from the remaining debt. As this is reduced with each payment, the interest portion also decreases, so that you pay less interest with each installment. Therefore, we always advise you to pay off your real estate loan from extra money from bonuses, salary increases or inheritances. You have various options such as special repayments or a repayment rate change. There is also the possibility to save money to invest it in the loan after the borrowing rate is fixed.

Reduce residual debt with special repayment

Reduce residual debt with special repayment

You pay an agreed amount back to the bank each month. If you stay at the same rate for the entire period, it may take several decades for your mortgage to be fully repaid. If you want to reduce your remaining debt earlier, a special repayment is a sensible option. With a special repayment, you make an additional payment in addition to the monthly payment in installments, usually once a year. Most banks offer free special repayments of up to five percent of the loan amount once a year. With a loan amount of 280,000 dollars, you can get up to 14,000 dollars annually. If you have not agreed a special repayment option in your real estate loan, the bank may ask for early repayment compensation.

Save and build up equity for follow-up financing

Save and build up equity for follow-up financing

As a rule, follow-up financing is due for construction financing after an agreed fixed interest rate. Because mostly after the fixed interest rate remains a residual debt that has to be financed further. At this point you have the opportunity to invest saved equity.

An example: You want to finance 280,000 dollars over a period of ten years. After ten years, you still have a remaining debt of USD 160,000. Because you are a savings fan, you have packed 20,000 dollars aside over the past ten years. You can now invest this money in follow-up financing. This reduces the remaining debt to be financed to 140,000 dollars.

The advantage: With the 20,000 dollars you pay off part of the remaining amount. This means you need fewer loans for follow-up financing, pay less interest and save money.

Saving yes, but different

Saving yes, but different

Whether you pay off a loan or save depends on the purpose you are pursuing. Saving in the classic sense, i.e. to increase the money, is only worthwhile if the return, i.e. the profit, is higher than the interest costs that you pay for the loan. 

However, it is always good to accumulate a certain buffer. So put money aside for investments in the house. If the house needs to be made, the washing machine breaks, or other investments are made, it is good to have something in hand. A financial buffer can also help with a short period of financial hardship. That means: save yourself a financial buffer for investments in and at the house. If you want to bring equity capital into the follow-up financing, you will also save money over a certain period of time. The rule is: the earlier you pay off your loan, the less interest costs you incur and the more you can save.

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