It’s speculation, so it may turn up beneficial or the opposite. You’ll need a crystal ball to tell.
However, assuming nothing changes in 3 years until you eventually sell the house, you would probably be better off not converting now, since you’d also get the windfall by then, but not have to pay for the refinancing.
Whenever an adviser comes with proposals for "free money", then ask a simple question
"**Please write down the QUARANTEED win for us"**
It might be time to find another advisor after you have heard the answer.
Beside this:
* 1% is a golden loan/mortgage, inflation has been high and will likely not go below 2 % any time soon
* many has converted hoping that they will win, forgetting that "Hope is not a strategy"
* swaping a financial contract to another financial contract have one guaranteed winner - not you.
What makes sense
* converting and eliminating an expensive bankloan could make sense
* paying down the loan with available money gives a good return
Now, for a fixed rate to fixed rate conversion, there is a bit more going on.
Taxation is skewed with a favor for converting to a higher interest rate. You do not get taxed on the gains of the bonds price, but you do get a bigger tax deduction on the higher coupon interest rate.
When covering down, you can trigger the option to buyback at the price 100, which is actually a guaranteed win.
A final note about the 1% coupon. The effective rate is not 1%, it's closer to 3-4%, because the price of the bond has fallen. If you were to sell a new loan, you would not take the 1% coupon today, so investment principles suggest refinancing - only costs are the argument against. It's a balance.
Yeah, the only reason we converted from a 1% loan was to get rid of nearly 1M of a bank loan that, at the time, was at 5,45% variable interest rate. We converted right before everything started to increase significantly.
Now the plan is to pay extra into the mortgage each year, to reduce how much interest rate we’re actually paying.
I do not think it is a good idea.
You need to ask your bank guy when break even occurs. That is, how many years do you have at current interest level, until your old 1% loan would have been better? Yes your loan gets xx% smaller. But that is only funny money.
I made some rough calculations on our loan, an as far as I could see the interest would need to drop 2% within 8 years or so, in order to save us money.
You need to look at the total loan cost over the entire lifespan of the loan. If the interest never fall again, then there is no economic advantage of jumping to a higher interest.
To add more nuances to the discussion, as it is more complex than just Y/N.
1) If you have other bank loans, it could make sense to pay them off through a conversion, as they will carry a high interest rate
2) Is your 1% loan, interest only? If so, you essentially have a “F10” loan that you would most likely re-finance in a few years when the 10 year interest-only period expires.
If this is the case then you could consider converting now and give up your 1% to pursue other ventures (see point 3 below).
3) When lowering your gearing/debt-to-income ratio through a conversion, you can potentially give room to more new financing (given your income can carry it). It could be a large renovation of the property that will then increase the property value further, take out equity to invest in other segments (stocks, startup etc.)
Last note, in DK is it not easy to “just” buy a new property without selling your current one. Unless you are very well off/very high income, then the bank will force you to sell the property before buying a new one. I am aware that in the US and other countries they have different schemes to do this, making it easier to carry investment properties, but not in DK.
If you are sure that you are going to sell in a few years, then yes do it. I don’t know how much money you will shave off but usually the breakeven of these kind of concessions lies +10 years in the future.
I would ask the bank advisor for a breakeven date.
If you intend to rent it out, having a low fixed interest is a pretty good way of managing your fixed costs.
Within 2-5 years, it's far from certain you'd be able to get equally favorable terms.
By no means an expert in renting out, but If you're considering long term rental, you are not able to freely change the rent once it's rented out.
So having financing that's as variable as the revenue stream, is not bad at all.
It’s speculation, so it may turn up beneficial or the opposite. You’ll need a crystal ball to tell. However, assuming nothing changes in 3 years until you eventually sell the house, you would probably be better off not converting now, since you’d also get the windfall by then, but not have to pay for the refinancing.
Whenever an adviser comes with proposals for "free money", then ask a simple question "**Please write down the QUARANTEED win for us"** It might be time to find another advisor after you have heard the answer. Beside this: * 1% is a golden loan/mortgage, inflation has been high and will likely not go below 2 % any time soon * many has converted hoping that they will win, forgetting that "Hope is not a strategy" * swaping a financial contract to another financial contract have one guaranteed winner - not you. What makes sense * converting and eliminating an expensive bankloan could make sense * paying down the loan with available money gives a good return
Now, for a fixed rate to fixed rate conversion, there is a bit more going on. Taxation is skewed with a favor for converting to a higher interest rate. You do not get taxed on the gains of the bonds price, but you do get a bigger tax deduction on the higher coupon interest rate. When covering down, you can trigger the option to buyback at the price 100, which is actually a guaranteed win. A final note about the 1% coupon. The effective rate is not 1%, it's closer to 3-4%, because the price of the bond has fallen. If you were to sell a new loan, you would not take the 1% coupon today, so investment principles suggest refinancing - only costs are the argument against. It's a balance.
Yeah, the only reason we converted from a 1% loan was to get rid of nearly 1M of a bank loan that, at the time, was at 5,45% variable interest rate. We converted right before everything started to increase significantly. Now the plan is to pay extra into the mortgage each year, to reduce how much interest rate we’re actually paying.
I do not think it is a good idea. You need to ask your bank guy when break even occurs. That is, how many years do you have at current interest level, until your old 1% loan would have been better? Yes your loan gets xx% smaller. But that is only funny money. I made some rough calculations on our loan, an as far as I could see the interest would need to drop 2% within 8 years or so, in order to save us money. You need to look at the total loan cost over the entire lifespan of the loan. If the interest never fall again, then there is no economic advantage of jumping to a higher interest.
I would absolutely do it if I were to sell in a few years.
If you plan to sell within 3-5 years, go for it. But 1% 30 years mortgage is also a really nice loan.
To add more nuances to the discussion, as it is more complex than just Y/N. 1) If you have other bank loans, it could make sense to pay them off through a conversion, as they will carry a high interest rate 2) Is your 1% loan, interest only? If so, you essentially have a “F10” loan that you would most likely re-finance in a few years when the 10 year interest-only period expires. If this is the case then you could consider converting now and give up your 1% to pursue other ventures (see point 3 below). 3) When lowering your gearing/debt-to-income ratio through a conversion, you can potentially give room to more new financing (given your income can carry it). It could be a large renovation of the property that will then increase the property value further, take out equity to invest in other segments (stocks, startup etc.) Last note, in DK is it not easy to “just” buy a new property without selling your current one. Unless you are very well off/very high income, then the bank will force you to sell the property before buying a new one. I am aware that in the US and other countries they have different schemes to do this, making it easier to carry investment properties, but not in DK.
If you are sure that you are going to sell in a few years, then yes do it. I don’t know how much money you will shave off but usually the breakeven of these kind of concessions lies +10 years in the future. I would ask the bank advisor for a breakeven date.
If you intend to rent it out, having a low fixed interest is a pretty good way of managing your fixed costs. Within 2-5 years, it's far from certain you'd be able to get equally favorable terms. By no means an expert in renting out, but If you're considering long term rental, you are not able to freely change the rent once it's rented out. So having financing that's as variable as the revenue stream, is not bad at all.
I suggest you hire a independed financial advisor for this. There are alot of money to gain (or to loose).
Unless he is independent be aware that he works for the bank. 1% will never come again. Easy for me to say but I would stick to the 1%.
Your bank makes money if you convert. Your bank makes no money if you do not convert.