Financial Idiot 001 - Refinancing

This Blog Post was originally distributed by the Newsletter "Financial Idiot". You can find and subscribe to it here.
DISCLAIMER: I'm an idiot and this isn't financial advice! You can lose money when investing, and you should never invest money you don't own or you can't afford to lose. I'm not responsible for your decisions!

Welcome to the first "real" issue of "Financial Idiot". I thought I start the newsletter with some insights into my financial backstory and why I'm investing nowadays.

After I finished civilian service, back in 2015, I moved out of my parents' home to an Apartment in a City nearby. I had the luck to receive a cheap "Duty Apartment" where I had to do a certain amount of paramedic night shifts.
I worked full time (40h/week) and did around 36 hours of paramedic night shifts per week. Fast forward to 2019, the night shifts got worse and worse, and my sleep cycle started to suffer drastically. Something had to change.

In 2018 I was joking with a paramedic colleague: he wanted to sell his Apartment, and  I wanted to buy it. A year later, in one of our night shifts together, I heard he still hadn't sold it. Suddenly a quick opportunity opened for me to buy it, but of course, I didn't have money. I went to my house bank and asked if it would be possible to finance the 82k€ the Apartment would cost.

I signed the mortgage contract a few days later and became a homeowner. I also have to add that I had a small credit already running for my car at that time, so I refinanced that with the Apartment.
Although I had some "orange" flags in my credibility (I didn't have equity), my account manager told me it would be possible. Of course, being young and needing the money, I didn't even bother asking another bank for a comparison mortgage as I thought I wouldn't get one anyway. So I went with the one I got from my house bank.

Let's have a look at the facts about that mortgage:

  • 300 Months of repayment time (25 years, but banks always calculate in months)
  • 110k€ Loan Amount
  • 107.466€ Payout (82k for the Apartment, around 10k for the car loan and a buffer for fees and potential repairs)
  • Quarterly adjusted interest (I was told it would be a fixed interest rate and only found out in 2020 while refinancing that it wasn't fixed, but based on the 3-Month Euribor)
  • Minimum interest rate of 1,8750%
  • Maximum interest rate of 5,500%
  • Effective annual interest rate 2,2%
  • Monthly repayment of 466,61€
  • A total sum to repay of 139.981,61€
  • Need to sign up for life insurance that would cover the loan

With the interest rate, they totally lied to me. I can't remember my account manager said I had a variable interest rate. I thought till my refinancing that I had a fixed rate (one of my mistakes).

Fast forward to 2019. A coworker told me that he was just refinancing with the help of a financial advisor. After he said to me that he would save a few 10k€ on interest (even though paying the penalty for early repaying), I thought that I needed to consult them too.

I contacted them around Christmas 2019 and didn't expect to receive a response until the new year. Just a day after I sent them an email, I got an answer, and a few days later, a consultant visited me, and we got through all the documents I've got.

First, he told me that I have a variable interest rate and that the "necessary" life insurance wasn't necessary at all. I was heavily shocked. I was a customer at my house bank since early primary school, and still, the fucked me over. And they didn't stop at the expensive loan; no, they also sold me irrelevant life insurance (27€ a quarter).

The consultant took his time to tell me everything about mortgages and what steps I could take from here on. I asked if it would even be possible for me to refinance the whole thing and basically start over again. I feared the contract I signed was "unbreakable", but the financial advisor told me not to worry, and it will be possible to refinance it.

Before I talk about the new loan, a sidestep how this financial advisor is working: instead of asking every bank in Austria what they could offer, they calculate an individual offer for me and send it to different banks. The banks then counteroffer, and I can pick the best or the one that suits me the most.
They work for "free", and only if a new loan comes to life would the new bank pay them. What they didn't tell me, but I already had in the back of my mind, the bank just won't pay them for bringing a new loaner. So after I got the new mortgage contract, I knew they would be getting 3.500€ directly paid by the bank from my new mortgage account.
I take from that that everyone in the finance world doesn't tell the whole truth. Here and there, facts are just discreetly not told.

After talking about everything finance, we started small talking about cryptocurrencies and general life plans. I also learned that as a single guy, I could take 400k€ and begin building a house if I wanted to. It wouldn't be easy, but the consultant told me they refinanced worse clients successfully.

I also told him that I wanted to buy (well, lease) a Tesla sometime in the future, which he quickly answered with a question: why wait? And yet again, I was out of words.
I asked how should I finance a 50k€ car if "I was barely able to finance my Apartment" (a sentence I heard from my house bank manager).

Easy it turns out: we would just say some stuff needs to be done (repaired or changed) in the Apartment, and then I could just borrow more money through the mortgage. "What the bank doesn't know doesn't interest it". I said 12k€ for the down payment of the leasing contract would be enough, so the consultant recalculated.

He got to me with a few different scenarios. A few with fixed interest rates (this time for real) and a few with "fully" flexible interest rates, and of course, all calculations with different repayment times. I thought about it and agreed to the flexible rate for 420 months (35 years). The longer you've got time to repay, the more relaxed you can do the repayment; for example, if something happens (losing my job), I could only pay interest for a few months or stop repaying at all.

My new contract now looks like the following:

  • 420 Months of repayment time (35 years)
  • 124k€ Loan Amount
  • 122.298,70€ Payout
  • Quarterly adjust interest rate based on the 3-Month Euribor with 1% mark-up and negative pass-through
  • Effective annual interest rate 0,90%
  • Monthly repayment of 340,08€
  • A total sum to repay of 142.664,36€

As you can see, the effective annual interest rate is way lower than the one from my first mortgage. With 14k€ more borrowed, I'm only repaying around 4k€ more. And I drive a Tesla now.

I have to admit I didn't nearly expect as much difference. I thought I could save a few hundred bucks, but if you count the 14k€ as cheaper, I saved 18k€, that's a tenth of the original mortgage. Of course, I could have bought the Tesla later, and I probably should have, but that's a topic for another Issue of "Financial Idiot".

If you take one thought from this, I'm an idiot, and you should always compare contracts. There indeed is a cheaper one than the first offer you get.

PS: I'm looking at you coworker, who told me about the financial advisors; it would be interesting to bring your finance story into the "Financial Idiot" if you would like to do so. :)

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