Author Topic: Big downpayment or not? European property.  (Read 1487 times)

drio

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Big downpayment or not? European property.
« on: August 08, 2017, 01:12:10 AM »
Hi,

I am in the process of buying a property in Europe. I haven't signed the mortgage yet and I am trying to decide what is the best
way to proceed. After the initial payments, the amount I would still own is ~250k. The interest rates are very low. If I do a fix mortgage rate, I can get a 2%-2.5% interest rate. Another thing to consider is considerably weaker than the Euro. The international transfers have also fees (I use Transferwise; other alternatives are welcome).

Considering all these, my questions are:

I am inclined to put a good down payment (~100k), get a fixed rate for 30 years and send two checks every month to reduce the interests fast. If down the road the dollar becomes stronger I can consider sending more money towards the principal.

Another alternative is to get a variable rate and pay off the property within the next 5 years.

Any comments, advice and/or references are welcome. Please, ask me if you need more info.

Thank you,
-drd
 


Moonwaves

  • Pencil Stache
  • ****
  • Posts: 754
  • Location: Germany
    • My blog
Re: Big downpayment or not? European property.
« Reply #1 on: August 08, 2017, 07:05:09 AM »
If you can say what country the property is in, people will probably be better able to chime in with advice.

With regard to sending two cheques every month to pay the mortgage, there are a couple of things to keep in mind: if you really mean cheques and not just payments, be aware that there can be pretty high fees for cashing cheques from a foreign country (even if they are in the currency of the country you are sending to). Again, knowing what country you're talking about would help someone to comment on this for certain. I can tell you, for example, that depositing an Irish cheque to my German account cost me far more than I expected (SEPA only applies to transfers, not cheques).

Secondly, if you get a fixed rate mortgage then surely it doesn't matter how quickly you pay it off. The amount of interest you pay is fixed. Never had a mortgage so maybe I'm just a bit clueless on this but certainly with an ordinary bank loan that is the case.

tralfamadorian

  • Bristles
  • ***
  • Posts: 396
Re: Big downpayment or not? European property.
« Reply #2 on: August 08, 2017, 09:06:06 AM »
The details given are sparse but if the interest rate is fixed for the term of the loan at 2-2.5% and the inflation rate of the economy from which payments are being made is less than or equal to that, then personally I would take the largest loan they would give me and pay it off as slowly as possible. 

MrSal

  • Pencil Stache
  • ****
  • Posts: 578
Re: Big downpayment or not? European property.
« Reply #3 on: August 09, 2017, 09:34:06 AM »
The details given are sparse but if the interest rate is fixed for the term of the loan at 2-2.5% and the inflation rate of the economy from which payments are being made is less than or equal to that, then personally I would take the largest loan they would give me and pay it off as slowly as possible.

This.

I have 4 properties in Portugal and I have them on a 49 year mortgage term and variable rate. My rates are around 1% right, actually in one of the properties the rate is 0.3ish % which is ridiculous.

I have about 220k in loan (I did 95% mortgage). I am paying about 490 euros/month total on the mortgage. Houses rent out total for 2450 euros and they are below market prices!

I have no desire of paying it off early nor making extra payments! Ill take those 48-50 years mortgages any day! Unfortunately in Portugal, the max term for mortgages are calculated as 75 years old - current age ... so the older you get, the lower the term.

A 60 year old cannot have a 30 year mortgage (only 15 years)

drio

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Re: Big downpayment or not? European property.
« Reply #4 on: August 14, 2017, 05:00:56 AM »
Thank you for your answer.

If you can say what country the property is in, people will probably be better able to chime in with advice.

With regard to sending two cheques every month to pay the mortgage, there are a couple of things to keep in mind: if you really mean cheques and not just payments, be aware that there can be pretty high fees for cashing cheques from a foreign country (even if they are in the currency of the country you are sending to). Again, knowing what country you're talking about would help someone to comment on this for certain. I can tell you, for example, that depositing an Irish cheque to my German account cost me far more than I expected (SEPA only applies to transfers, not cheques).

Secondly, if you get a fixed rate mortgage then surely it doesn't matter how quickly you pay it off. The amount of interest you pay is fixed. Never had a mortgage so maybe I'm just a bit clueless on this but certainly with an ordinary bank loan that is the case.

The property is in Spain.

I meant to say, sending two payments on every check.
What I am currently doing is this: I have a bank account in Spain and I send money over from the US. I use transferwise for that. It is ok since I get a decent currency exchange but I have to pay some feeds on every transaction. Let me know if you use other methods.


drio

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Re: Big downpayment or not? European property.
« Reply #5 on: August 14, 2017, 05:05:16 AM »
The details given are sparse but if the interest rate is fixed for the term of the loan at 2-2.5% and the inflation rate of the economy from which payments are being made is less than or equal to that, then personally I would take the largest loan they would give me and pay it off as slowly as possible.

Aren't you concern about a potential rapid change in the interest rate? I am not sure how real that is although I'd imagine the changes would be slow. What would you do in that situation?

drio

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Re: Big downpayment or not? European property.
« Reply #6 on: August 14, 2017, 05:10:44 AM »
The details given are sparse but if the interest rate is fixed for the term of the loan at 2-2.5% and the inflation rate of the economy from which payments are being made is less than or equal to that, then personally I would take the largest loan they would give me and pay it off as slowly as possible.

This.

I have 4 properties in Portugal and I have them on a 49 year mortgage term and variable rate. My rates are around 1% right, actually in one of the properties the rate is 0.3ish % which is ridiculous.

I have about 220k in loan (I did 95% mortgage). I am paying about 490 euros/month total on the mortgage. Houses rent out total for 2450 euros and they are below market prices!

I have no desire of paying it off early nor making extra payments! Ill take those 48-50 years mortgages any day! Unfortunately in Portugal, the max term for mortgages are calculated as 75 years old - current age ... so the older you get, the lower the term.

A 60 year old cannot have a 30 year mortgage (only 15 years)

How do you send the money from the US to pay the monthly payments on the loan?
As I mentioned above, I use transferwise to transfer the money to a Spanish bank account that I own. From there I pay the company. I couldn't pay directly from my US account.

MrSal

  • Pencil Stache
  • ****
  • Posts: 578
Re: Big downpayment or not? European property.
« Reply #7 on: August 15, 2017, 01:58:36 PM »
The details given are sparse but if the interest rate is fixed for the term of the loan at 2-2.5% and the inflation rate of the economy from which payments are being made is less than or equal to that, then personally I would take the largest loan they would give me and pay it off as slowly as possible.

This.

I have 4 properties in Portugal and I have them on a 49 year mortgage term and variable rate. My rates are around 1% right, actually in one of the properties the rate is 0.3ish % which is ridiculous.

I have about 220k in loan (I did 95% mortgage). I am paying about 490 euros/month total on the mortgage. Houses rent out total for 2450 euros and they are below market prices!

I have no desire of paying it off early nor making extra payments! Ill take those 48-50 years mortgages any day! Unfortunately in Portugal, the max term for mortgages are calculated as 75 years old - current age ... so the older you get, the lower the term.

A 60 year old cannot have a 30 year mortgage (only 15 years)

How do you send the money from the US to pay the monthly payments on the loan?
As I mentioned above, I use transferwise to transfer the money to a Spanish bank account that I own. From there I pay the company. I couldn't pay directly from my US account.

I have an account with a portuguese bank there. The rents go in the account and the bank automatically takes the mortgage payment at the due date.

Whenever I have a sizeable chunk of money in the account I transfer it to my brokerage account for other investments ...

yeah you probably can't pay the bank directly from US

neonlight

  • Stubble
  • **
  • Posts: 132
Re: Big downpayment or not? European property.
« Reply #8 on: August 15, 2017, 02:07:49 PM »
Out of curiosity, how do you manage properties that are so faraway? Through agents?

And the purchase was mostly motivated by recreational purposes or do you see major value in appreciation? Thanks

Christof

  • Bristles
  • ***
  • Posts: 494
  • Age: 41
  • Location: Germany
Re: Big downpayment or not? European property.
« Reply #9 on: August 15, 2017, 02:35:19 PM »
Currently I use Revolut, except it's the opposite direction. SEPA transfers onto the Revolut account are free, ACH from the account are, too. I do have the premium account, which is another 7.99 per month, so only cheaper than transferwise if you transfer more than 1,600 Euros monthly. Not sure about the ACH transfer fees for the free account. Revolut is a multi currency debit card, so you can lock in the current spot rate at any time during the month, if you consider it to be good. Remember, though, that you do not know where rates are going in the future.

SwordGuy

  • Magnum Stache
  • ******
  • Posts: 3286
  • Location: Fayetteville, NC
    • Flipping Fayetteville
Re: Big downpayment or not? European property.
« Reply #10 on: August 15, 2017, 02:43:28 PM »
Secondly, if you get a fixed rate mortgage then surely it doesn't matter how quickly you pay it off. The amount of interest you pay is fixed. Never had a mortgage so maybe I'm just a bit clueless on this but certainly with an ordinary bank loan that is the case.
The OP has now clarified that the country in question is Spain, so they will need to check this point out.

I mention it because the USA, what you say is not true.  A fixed rate mortgage means the interest rate on the unpaid balance of the loan is fixed.  If you pay extra money early, your unpaid balance on the loan is lower, therefore the calculated amount of interest is lower.   

An example of a mortgage calculator that follows this rule can be found here:

https://www.drcalculator.com/mortgage/


Are you positive that German mortgages work as you describe?

Christof

  • Bristles
  • ***
  • Posts: 494
  • Age: 41
  • Location: Germany
Re: Big downpayment or not? European property.
« Reply #11 on: August 15, 2017, 03:11:37 PM »
In Germany the interest rate is fixed for a defined number of years, most commonly ten years. After that time you usually get another mortgage at the then current rate for another number of years until you paid of the mortgage (after 30 years, or so). The longer the rate is fixed, the higher the interest rate. When we refinanced this year, it was 1.2% for five years vs 1.5% for ten years.

In addition, you can negotiate the number of extra payments you can make and how often you can change your monthly payment. Any of those will increase the interest rate, as well.

If you re-pay a mortgage early, you still owe the bank the interest for the full duration (minus any expenses the banks saves) for the first ten years. After ten years you are allowed to terminate the contract with six months notice, but only in full. The bank is bound to the interest rate for the full duration of the fixed rate.

Other types of mortgages are possible, but not common. They are often used in complex business transaction for truly expensive homes, not for ordinary homes.

MrSal

  • Pencil Stache
  • ****
  • Posts: 578
Re: Big downpayment or not? European property.
« Reply #12 on: August 15, 2017, 03:44:32 PM »
Out of curiosity, how do you manage properties that are so faraway? Through agents?

And the purchase was mostly motivated by recreational purposes or do you see major value in appreciation? Thanks

Whats there to manage?

I am portuguese by the way... I used to lived there and have been living in the US for 3 years now.

But even then, I don't need a manager for the most part. Maintenance is nonexistent (yay concrete houses!). In 4-5 years I have had the houses, never had a single phone call/email from my tenants (I have direct withdrawal set up so rent money just shows up in my account at due date). September will be the first time I will have a vacancy, which I actually appreciate it since my rents are like 30-40% below market and I will finally have the opportunity to raise them!

The purchase was major appreciation and value.

At the time, a 500 sq ft apartment in the center of Lisbon could be had for 45-50k in historical areas. I bought three 1 bedroom/studios 500 sq feet each and one 3 bedroom in the main avenue, with the thought of a little appreciation and for cashflow (since mortgages are very long, mortgages are very cheap in terms of absolute values (250k loan is a 500 dollar monthly payment). I was gonna go for AirBnb at the time, but then I moved to the US ... I opted for normal rental market instead of airbnb since i wouldn't be there to manage it.

I bought everything for 250kish ...

The market has gone through the roof... you could buy backthen houses for 100 USD per sq foot in a major capital of Europe right in the center... prices right now in the historical areas go for anywhere between 400-1000 dollars per square foot, so currently I have a lot of equity available.

My mother has keys to the houses so if anything needs done she attends to it - like next month when one of the tenants leaves - I will put pictures and ads on Facebook and forward all contacts for showings to my mother. I expect to have the place rented probably within the day or something... lots of international students... tourists... and people just looking for a place.
« Last Edit: August 15, 2017, 03:47:54 PM by MrSal »

peffel

  • 5 O'Clock Shadow
  • *
  • Posts: 1
Re: Big downpayment or not? European property.
« Reply #13 on: August 16, 2017, 04:16:43 AM »
Out of curiosity, how do you manage properties that are so faraway? Through agents?

And the purchase was mostly motivated by recreational purposes or do you see major value in appreciation? Thanks

Whats there to manage?

My mother has keys to the houses so if anything needs done she attends to it - like next month when one of the tenants leaves - I will put pictures and ads on Facebook and forward all contacts for showings to my mother. I expect to have the place rented probably within the day or something... lots of international students... tourists... and people just looking for a place.

That wouldve been an useful information up front :)

Moonwaves

  • Pencil Stache
  • ****
  • Posts: 754
  • Location: Germany
    • My blog
Re: Big downpayment or not? European property.
« Reply #14 on: August 16, 2017, 04:52:12 AM »
Secondly, if you get a fixed rate mortgage then surely it doesn't matter how quickly you pay it off. The amount of interest you pay is fixed. Never had a mortgage so maybe I'm just a bit clueless on this but certainly with an ordinary bank loan that is the case.
Are you positive that German mortgages work as you describe?
Not at all, that's why I mentioned I'd never had a mortgage and that I only knew it was the case for ordinary bank loans. :)  But Christof's post would seem to indicate that it is true for most mortgages as well.

Megma

  • Pencil Stache
  • ****
  • Posts: 563
Re: Big downpayment or not? European property.
« Reply #15 on: August 18, 2017, 11:32:43 AM »
In Germany the interest rate is fixed for a defined number of years, most commonly ten years. After that time you usually get another mortgage at the then current rate for another number of years until you paid of the mortgage (after 30 years, or so). The longer the rate is fixed, the higher the interest rate. When we refinanced this year, it was 1.2% for five years vs 1.5% for ten years.

In addition, you can negotiate the number of extra payments you can make and how often you can change your monthly payment. Any of those will increase the interest rate, as well.

If you re-pay a mortgage early, you still owe the bank the interest for the full duration (minus any expenses the banks saves) for the first ten years. After ten years you are allowed to terminate the contract with six months notice, but only in full. The bank is bound to the interest rate for the full duration of the fixed rate.

Other types of mortgages are possible, but not common. They are often used in complex business transaction for truly expensive homes, not for ordinary homes.

Das ist sehr Interessant!

So if I understand correctly, they amount you will pay in interest on a German Mortgage with a fixed rate is also fixed and there is then no advantage to paying it off early. If, 5 years in the future, your scheduled amount of interest was 100 Euros, even if because of pre-payment your balance was zero by the time 5 years arrived, you still owe the bank 100 Euros?

I just learned that I will never get a mortgage in Germany.

As SwordGuy said, it is very different in the US. When you get the loan there is a projected amount of interest you will pay but if you pay extra on the principle you will pay less for interest as you have reduced the principle. The bank is basically guaranteed nothing. I could take out the loan today and pay it off in full next month and they are then allowed nothing further from me, I have met my obligation.

Also even though I am on a payment schedule, I can pay early or extra at my discretion. There are some loans for things like cars or furniture where they are extra charges for pre-payment but these are normally pretty shady and no sane person would agree.

Yet Americans still cannot save a dime, even with all of this in our favor.
Get cash back on your online shopping from Mr Rebates (hotels, flights, ebay, groupon and more): http://www.mrrebates.com?refid=453502 (referral link, thank you!)

MrSal

  • Pencil Stache
  • ****
  • Posts: 578
Re: Big downpayment or not? European property.
« Reply #16 on: August 18, 2017, 11:42:28 AM »
I doubt it is like that in Germany. It cannot be...

There must be some misunderstanding here... If the amortization schedule on 100k loan at 3% amounts to about 52k in interest over 30 years... if I pay the loan in 3 years I doubt very much that I had to pay them the 100k principal+52k in interest.

What happens in Europe usually, unlike the US, is if you make extra payments, you usually get a penalty of the amount.

If you prepay your mortgage before the schedule you get a 2% penalty. So, if I owe 100k and want to pay it off, I am incurring 2000 dollars in fees

Christof

  • Bristles
  • ***
  • Posts: 494
  • Age: 41
  • Location: Germany
Re: Big downpayment or not? European property.
« Reply #17 on: August 18, 2017, 02:17:33 PM »
There must be some misunderstanding here... If the amortization schedule on 100k loan at 3% amounts to about 52k in interest over 30 years... if I pay the loan in 3 years I doubt very much that I had to pay them the 100k principal+52k in interest.

First of all, there are other mortgages available, they are just rarely used. 99% of all non-commercial mortgages lock an interest in for a certain amount of years. The longer the rate is fixed, the higher the interest rate. Most people lock them in for ten, we did for 17 years, which was the full mortgage.

In addition many mortgages have a clause that allows you to make an extra payment once a year up to a predefined amount. With our current mortgage this is 5,000 Euros in a single payment once per year, with the previous one there was none at all.

You sign a contract where you agree to pay a fixed interest rate and the bank guarantees you that no matter what the market condition is that you interest rate doesn't change. You don't benefit from falling interest rates, you don't suffer from raising interest rates. As this is a contract, you can't just decide to quit. If you want to terminate early, you have to compensate the bank for their losses. Same thing as terminating a mobile contract early in the US.

What you owe is the interest the bank would have received minus any expenses the bank would have had if you continued with the mortgage, so management fees, insurance, etc. This is limited to a maximum of 10.5 years, because after that you have a legal right here to terminate a contract. After ten years, you can never owe the bank more than 6 months worth of interest.

For a thirty year loan of 100,000 at 3% that you want to pay off early after three years, you probably have to pay about 15K in prepayment penalties.

Christof

  • Bristles
  • ***
  • Posts: 494
  • Age: 41
  • Location: Germany
Re: Big downpayment or not? European property.
« Reply #18 on: August 18, 2017, 02:26:38 PM »
If, 5 years in the future, your scheduled amount of interest was 100 Euros, even if because of pre-payment your balance was zero by the time 5 years arrived, you still owe the bank 100 Euros?

You can't even get the balance to zero... First of all, mortgage payments are deducted from your checking account here, not actively paid by you. In December we terminated our 17-year mortgage after more than 10 years with six month notice and got another mortgage at a lower rate (1.5 vs. 4.25), this time fixed for 10 years.

On Jun, 30 our new bank paid our old bank. Except the new mortgage is about 250 Euros less than what we owe. So we had to pay this amount by Jun 30. Our old bank informed us about this in early May, and I just transferred the money within days. May, 31 the bank is deducting the monthly mortgage payment and the reduced it by the amount I already paid them. So I had to transfer 250 Euros again.

Banks here do not let you make early payments unless it's permitted in the contract. If you do, they send the money back to you on the next scheduled payment day.

MrSal

  • Pencil Stache
  • ****
  • Posts: 578
Re: Big downpayment or not? European property.
« Reply #19 on: August 18, 2017, 03:03:26 PM »
There must be some misunderstanding here... If the amortization schedule on 100k loan at 3% amounts to about 52k in interest over 30 years... if I pay the loan in 3 years I doubt very much that I had to pay them the 100k principal+52k in interest.

First of all, there are other mortgages available, they are just rarely used. 99% of all non-commercial mortgages lock an interest in for a certain amount of years. The longer the rate is fixed, the higher the interest rate. Most people lock them in for ten, we did for 17 years, which was the full mortgage.

In addition many mortgages have a clause that allows you to make an extra payment once a year up to a predefined amount. With our current mortgage this is 5,000 Euros in a single payment once per year, with the previous one there was none at all.

You sign a contract where you agree to pay a fixed interest rate and the bank guarantees you that no matter what the market condition is that you interest rate doesn't change. You don't benefit from falling interest rates, you don't suffer from raising interest rates. As this is a contract, you can't just decide to quit. If you want to terminate early, you have to compensate the bank for their losses. Same thing as terminating a mobile contract early in the US.

What you owe is the interest the bank would have received minus any expenses the bank would have had if you continued with the mortgage, so management fees, insurance, etc. This is limited to a maximum of 10.5 years, because after that you have a legal right here to terminate a contract. After ten years, you can never owe the bank more than 6 months worth of interest.

For a thirty year loan of 100,000 at 3% that you want to pay off early after three years, you probably have to pay about 15K in prepayment penalties.

Oh thats totally different.

What you are saying is just a fixed term rate not the interest per se.

Yes in Europe there are rarely 30 year fixed rates like in the US. In Europe the rates most used are either variable - benchmarked to Euribor 6M or 12M ... or a mix of a 10 Year Swap rate on a 30 year loan (first 10 years the rate is fixed and then it floats) which is very much like a 10/1 ARM in the US.

This si very much different than what most people got from your first post... where you made it sound the amount of interest on the amortization scheduled would always be owed, which is not the case.

But yes, there are pre payment penalties and some banks do put some caps on it too...

Christof

  • Bristles
  • ***
  • Posts: 494
  • Age: 41
  • Location: Germany
Re: Big downpayment or not? European property.
« Reply #20 on: August 19, 2017, 08:53:11 AM »
This si very much different than what most people got from your first post... where you made it sound the amount of interest on the amortization scheduled would always be owed, which is not the case.

I'm glad I could clear up any misunderstandings with my second reply!

To be fair, though, I did say that the interest rate was fixed, not the total amount of interest and that any amount the bank saves is not owed. With the vast majority of contracts not exceeding 10 years (there's little benefit for the bank), one also rarely deals with partial pre payment penalties.

During the floating phase of the mortage (once the interest rate isn't fixed, anymore) you still can't make any payment you want. It's a based on the percentage of the mortgage you pay back and the current interest rate. Usually you can terminate the contract in full with six month notice, then.

Verdandi

  • 5 O'Clock Shadow
  • *
  • Posts: 57
Re: Big downpayment or not? European property.
« Reply #21 on: August 25, 2017, 10:03:23 AM »
I'd like to add that there IS actually a type of contract in Germany that lets you pay back the mortgage as quickly as you want without penalty payments.
It's called a Bausparvertrag. The deal is: you save a 35-40% down payment and get a mortgage with a really low fixed interest rate for the remaining 65-60%.
It's certainly not for people who want as many properties as quickly as possible, as you have to save a lot first, but I like it :-)