What is Freedom of Interest? Get the answer here
This article deals with the freedom of interest. Repayment is repayment of the outstanding debt. It is therefore part of the outstanding debt you repay, eg. every month. With interest on repayment it means that in all its simplicity you are free from repayment. As is often the case, there is talk of freedom of interest in connection with a mortgage or mortgage loan. This is because they are almost the only loans with one long enough to make it feasible to have interest-free.
However, it can be argued that there is also a form of credit repayment, in that you decide when you pay off the loan.
In connection with the mortgage, the maximum repayment period is 10 years. This means that for the first 10 years you will not pay off the loan, but only pay interest and contributions.
The paper sounds like a good solution to push payments in front of you, as you will usually also earn higher income over 10 years. But there are both “pros and cons” of the interest on installments.
Why is a Mortgage-Free Mortgage Loan More Expensive?
The reason why it is more expensive to have a loan with interest-free loan is because there are higher credit costs associated with it.
There are two reasons for this.
1: If you have a regular loan with installments , you pay off the outstanding debt from day one. As you pay off from day one, your residual debt will also be reduced from the start.
Interest and repayments are a percentage of the outstanding debt. In other words, you pay a percentage of the outstanding debt.
Therefore, your interest and installment payments will decrease as you reduce the outstanding debt.
But but but. This is precisely the problem with a loan with interest-free loan.
If you have 10 interest-free years, your outstanding debt will remain the same throughout the interest-free period. You therefore pay interest and repayment on the full outstanding debt throughout the period.
Can you see the difference?
When you have a loan with repayment, you will pay interest and repayment of a residual debt that becomes smaller and smaller.
When you have a loan WITHOUT repayment, you will pay interest and repayment of a residual debt that remains the same throughout the period of repayment.
Therefore, your credit costs will be higher for interest-only loans.
2: As the lender is at greater risk of a loan with interest-free loan, it will be reflected in interest and contributions.
The greater the risk of lending money, the more expensive it is to borrow money.
Thus, there is a slightly higher interest rate and slightly higher contribution associated with a loan with interest-free interest.
For Interest-Free – If you use it right
There are several things that speak for interest on installment. Well feel if you use it right.
In order to understand the whole “concept” of interest-free, we need to master the most important concepts.
Monthly payments (in connection with mortgages) consist of installments, interest and contributions.
Thus, when you talk about repayment, only the repayments are free. Not the rest of the payments.
This means that during the repayment period you do not reduce your debt at all.
This has the consequence that after the freedom of interest you still have to pay back the same amount. You just have less time to do it.
But it might actually be a good idea with interest-free anyway. This is because a mortgage loan is usually ready for the cheapest loan to have.
Therefore, it may be a good idea to take out a mortgage with a repayment loan if you take advantage of the repayment period to pay off more expensive debt, such as the mortgage in the bank.
An example of how to make good use of the repayment interest could be:
You borrow money for a house for DKK 2,000,000.
You are in your own payment of DKK 100,000 (5% of the purchase price)
You borrow DKK 300,000 in the bank with a maturity of 10 years and an interest rate of 4.5% (15% of the purchase price)
You borrow DKK 1,600,0000 at the mortgage institution with a maturity of 30 years (10 years interest free) and an interest rate of 3%.
By taking advantage of the repayment period to pay off the bank loan faster than usual, you can save money on interest payments.
On the other hand, if you simply use the extra financial freedom to increase your consumption, you will find that reality can hit hard when the grace period ends. It will because your benefits after the grace period will be higher because you now have
less years to pay off the outstanding debt.
Alternatively, in some cases it is possible to take out two mortgages. So instead of taking one big mortgage, you can take two, one of which is repayable and the other is unpaid.
That way you will have a little more financial freedom, without leaving your “hair in the mailbox” when the grace period is over.
When the repayment period is over
We all know how to push some things in front of us. It can for example. be postponing the laundry for a few days.
A loan with interest-free loan can be considered a little in the same way.
Let’s take a starting point in the example above where you borrow DKK 1,600,000 from a mortgage institution, the term is 30 years with 10 years of interest free.
If you had chosen a regular loan with repayments, your monthly repayment would be around DKK 4,400 per month. month (Payments only).
If, on the other hand, you choose the first 10 years to be installment-free, you will have a repayment of DKK 0 for the first 10 years (120 months). But after the grace period, it will only take 20 years (240 months) to repay the DKK 1,600,000. Your monthly installment will therefore
now be at DKK 6,600 so a lot more.
You should always keep this in mind when considering a loan with interest-free loan.
However, as described earlier, it may make sense to choose the repayment period if you pay off more expensive debt or invest the money with a good return.
How do I Find the Best Mortgage Loan?
There are a lot of different mortgage loans with interest free, so it can be difficult to see which one is best for you.
Let us help you find the best mortgage loan with no repayment.
You can go directly to our loan calculator here.