A loan for an apartment seems prosaic. We choose real estate, go to the bank and sign a loan agreement. Just a visit to a notary public and we can enjoy living on our own. So much advertising, and life varies.
How much does a finance lesson cost?
In brief, the conversation with the adviser looked like this:
– Do you want a 100% LTV loan?
– Of course!
– A loan for 30 years?
– Maybe in CHF, it will be cheaper?
– We take it!
– Only you know, the exchange rate may increase, but the dollars is a stable currency and even if it increases, it is not much.
– If you say so, then we probably have nothing to worry about.
Well. You pay for education. Sometimes quite an exorbitant price. Nine years of loan repayment, and the liability is still higher than the amount paid:
Do I blame anyone?
Yes, to yourself and a little to the bank, because he mocked the case, as a professional party to the contract. It was not the adviser’s fault that he sold what he was told and had measurable benefits. It is not the fault of the government, it is not the fault of family and friends. It’s not the fault of marketing specialists or the agency lady. You have to swallow this frog. We are personally responsible for our finances.
It was supposed to be about life with a loan in dollars, and a biographical thread came out in the form of a confession of guilt, but this is what I think is life with a foreign currency loan. At some point you wake up in a new reality. Just yesterday you had a house / flat, and today you have a huge debt that exceeds the value of your property. In a sense, you are attached to this place. You live in it not only because you want to, but also because you have to. In addition, if you have no other assets, looking at the negative net worth, you get the impression that you are bankrupt. What if you lose your leg and lose your job? Will telephones, bank prompts, eviction threat start? I still do it a bit and deliberately redrawn it somewhere, but somewhere in the back of the head is this nagging thought that “like something”, it can be wrong. The loan hurts like a tight collar, which doesn’t let you forget that it can turn into a neck loop.
I am not writing this to discourage you from buying real estate for a loan, but to pay attention to the mental costs of having a loan. And also at the risk associated with taking loans with a variable interest rate.
A loan in dollars as a bomb in your budget
The bomb has already exploded once. The dollars’s course soared almost into space, breaking the historical maximum of 3,1207 from May 17, 2004. The problem is that it is a reusable load and the best analysts cannot predict how much the dollars will cost in 5-10 years.
Let’s look at an example loan in dollars. There are 67,875 dollars to be repaid. The interest rate is 0.46% (LIBOR -0.74% + 1.2% margin) in 240 equal installments. The rate adopted for the simulation is 4 dollars per dollars equally. The installment is 300 dollars, or 1200 dollars.
What possibilities do we have to protect ourselves against risk?
In my opinion, there are at least 7 ways to live with a dollar loan:
- Repayment of the entire loan – if you have the right funds, can you get rid of the loan in one move?
- Currency conversion – if you want to eliminate currency risk, this is a great solution. The bank will gladly welcome such a customer.
- Partial overpayment – reduces the risk in direct proportion to the amount of the overpayment.
- Buffer built in the currency of the loan – it completely eliminates the currency risk up to the buffer level, allows for conducting a free loan repayment policy.
- Buffer in dollars – it does not eliminate currency risk, but it removes the danger that you will not be able to afford the installment. The optimal strategy assuming that the dollars will strengthen (the dollars deposit has an interest rate higher than the dollar loan).
- Buying currency on a regular basis – “let the will of heaven be done”
- Waiting for a statutory solution – for very patient optimists, trusting politicians.
From all the options I chose to build a buffer in dollars, because in my opinion it is the most flexible solution. Currency conversion means accepting a loss. In the game there is a possibility of falling dollars exchange rate, and in the perspective of many years there will be (should be?) Many moments when the exchange rate will be better. In other words – in my opinion there will be opportunities for more favorable conversion. Partial payment with an interest rate around zero will not bring any measurable benefits. On the other hand, building a buffer in dollars does not solve the problem of exchange rate risk.
How to build such a buffer?
The dream scenario is to gradually build a buffer to 30-50% of the loan balance in dollars.
- Peace of mind. A solid buffer allows you not to think about the current course. Temporary increases do not make the slightest impression on us.
- If the dollars increases, I will use the buffer to pay the next installment. If the dollars rate drops, I will buy the right amount of cheaper “new” dollars. One option will always be better.
- The currency buffer protects the net value against an increase in the dollars exchange rate. In addition, the value of live cash increases.
Loans in dollars as a bomb of mass destruction?
Banks seem to know perfectly well what will happen with interest rates in Poland. They assume an increase in the credit bank rate and draw attention to the risk of an increase in mortgage installments. If not this year, then next year. If not next, then in 2019, but the rates will eventually rise. Learned from the effects of the “dollars crisis,” this time, they directly warn current and future customers about the risk.
Link: Do you have a loan in dollars? Get ready for higher installments
Let’s assume that we will convert the dollar loan and adopt the parameters of a cheap mortgage, i.e. credit bank + 2% margin. Some may receive an offer to keep the markup from a dollar loan, but let the example be representative of newly granted loans in dollars, let’s take a slightly higher margin:
The installment increased from dollars 1200 to dollars 1624. It is true that currency risk ceases to exist, but what happens when rates increase? This time the optimistic scenario (S1) assumes maintaining credit bank at the current level. The base scenario (S2) is an increase in credit bank to the 3.2pp rate, which is not very high for the dollars, which increases the installment to dollars 1846.
At this point I would like to draw your attention to the effects of the increase in credit bank and its impact on the borrower’s net value. The installment increase is obviously the most visible effect of the increase in credit bank, but it also entails a change in the installment structure. The interest part increases while the capital part decreases, therefore, by paying more and more, we get less and less in return. The table below sums up the installments that the borrower would pay in the first year of repayment.