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At least in Germany, it's common to have a fixed interest rate for up to 30 years (more common are 10 and 20, 30 is rare). You can refinance, but you have to ba

At least in Germany, it's common to have a fixed interest rate for up to 30 years (more common are 10 and 20, 30 is rare). You can refinance, but you have to basically pay a fee that covers the expected loss for the bank, so that may not be worth it. Other countries differ, for example AFAIR it was common in Poland to have housing credits pegged to the swiss franc. However, I'm fairly certain that the GP is exaggerating. Even 15 years ago, no bank asked for 10%. 5% would have been a lot, something around 3.5 - 4% common. My parents paid between 7 and 10% when they built their house, but that's like at least 40 years now. Today, something around 2% is the going rate. At least in the booming markets, however, the rise in prices has completely eaten the gain in interest. I could for the same monthly installmend pretty much finance the same size as I could 10 years ago, the interest rate would be lower, but the principal substantially higher.

analog31 6y ago
That's interesting. In the US, it's called a "pre-payment penalty," where you have to pay a fee if you want to pay off a loan early. It's not imposed by regulation, but is up to each lender, so you can choose a loan that does not have such a penalty. Often consumers with weak credit or low incomes end up with loans that have worse terms, such as these penalties. My family refinanced our home loan, and it was just a matter of going to the bank and signing the paperwork that they filled out for us. It took less than an hour, and the ROI was not hard to compute.
- saagarjha 6y ago
  Perhaps I don’t understand why there should be a penalty to pay off a loan too early? I’ve given the bank back their money; isn’t that exactly why I was paying interest in the first place?
  - pb7 6y ago
    They write the terms to benefit themselves; in this case, to guarantee a minimum payout from the effort/risk. Not justifying it but a bank does as a bank does.
  - ARandumGuy 6y ago
    Because paying off a loan early means that loan has had less time to generate interest, which means the bank gets less money. On an extreme example, imagine taking out a loan, then you pay it all back the next day. The loan has earned no interest, but the bank had to spend a bunch of time and money to get the loan set up. Of course, early payment penalties are still pretty scummy. However, it does make sense why a bank would have one.
    - names_are_hard 6y ago
      I don't know if they're scummy. When I buy a typical corporate bond I expect that the company will pay until maturity. If I buy a callable bond wouldn't I expect to be compensated for the one sided exposure to interest rate risk I'm exposing myself to (rates go up I lose, rates go down I lose)? With consumer debt we have different expectations of what's fair, but consider the bank's risk profile here - if interest rates go up those outstanding mortgages are taking them for a ride, and if they go down the customers refi... seems natural they'd want to minimize prepayments.
      - analog31 6y ago
        In my view, the chance that a loan will be paid off early can be worked into the risk calculation that the bank uses for coming up with the interest rates and fees that they are willing to offer, and also for computing the cash value of the mortgage on the secondary market. At the end of the day, the bank just wants to know that they can sell the loan for more than it cost to originate it. An issue with consumer debt is that a proliferation of fees and "fine print" make it confusing for folks to understand what they're signing up for, and to do comparison shopping on loans. Traditionally, folks were advised to be wary of prepayment penalties because of a widespread strategy to prepay a loan if possible. When interest rates were high, this was like an investment with a guaranteed percentage return. For instance, my family took out a loan with a particular payment, but we paid more than the minimum each month because we could afford it. On the other hand, being able to drop back to a lower payment was a kind of safety net in case something happened to one of our jobs, or something like that.
  - names_are_hard 6y ago
    Think of it like returning an item to a store and paying a restocking fee. Stores would prefer all sales be final, but where they allow returns, they prefer to charge for the service when they can. You bought a mortgage from the bank, now you want to return it. They want to charge you for that. See, the bank is not like your friend that lends you money. When your friend lends you money they are happy to receive payment early because they didn't actually want to lend it at all, it was a favor to you. They probably didn't charge interest, but if they did they did so because they "had to" (meaning they can't afford to lend you money as a flat out favor so they'll take the market rate, like when my friend the mechanic fixes my car but asks me to pay him because he's gotta live). When the bank lends money they _want_ to lend it, it's the whole point of their business. That's why they exist, to charge interest. When you pay back early you're reneging on the deal, so to speak, and defeating the purpose of the business. They don't want the money back until the agreed upon time, it throws a wrench in their plans, budgets, forecasts, etc. The fee covers the cost of this inconvenience and discourages you from doing so.
- Xylakant 6y ago
  It’s the same in Germany, it’s laid out in the mortgage terms. As a rule of thumb, you can pay up to 5% of the principal in a single lump sum every year on top of your usual payments directly reduces the principal at no extra fee. You can negotiate higher yearly extra payments, but that usually comes at the cost of higher interest. Sometimes you’re able to refinance at no prepayment fee, but that comes down to how hard the bank wants to keep you as a customer etc.
- refurb 6y ago
  Interestingly, the US has laws that limit pre-payment penalties to a certain set of mortgages. If you get a standard 30-year fixed, the mortgage company can't impose a prepayment penalty.[1] [1]https://www.nolo.com/legal-encyclopedia/when-are-prepayment-penalties-allowed-new-mortgages.html https://www.nolo.com/legal-encyclopedia/when-are-prepayment-...

analog31 6y ago

That's interesting. In the US, it's called a "pre-payment penalty," where you have to pay a fee if you want to pay off a loan early. It's not imposed by regulation, but is up to each lender, so you can choose a loan that does not have such a penalty. Often consumers with weak credit or low incomes end up with loans that have worse terms, such as these penalties. My family refinanced our home loan, and it was just a matter of going to the bank and signing the paperwork that they filled out for us. It took less than an hour, and the ROI was not hard to compute.

saagarjha 6y ago
Perhaps I don’t understand why there should be a penalty to pay off a loan too early? I’ve given the bank back their money; isn’t that exactly why I was paying interest in the first place?
- pb7 6y ago
  They write the terms to benefit themselves; in this case, to guarantee a minimum payout from the effort/risk. Not justifying it but a bank does as a bank does.
- ARandumGuy 6y ago
  Because paying off a loan early means that loan has had less time to generate interest, which means the bank gets less money. On an extreme example, imagine taking out a loan, then you pay it all back the next day. The loan has earned no interest, but the bank had to spend a bunch of time and money to get the loan set up. Of course, early payment penalties are still pretty scummy. However, it does make sense why a bank would have one.
  - names_are_hard 6y ago
    I don't know if they're scummy. When I buy a typical corporate bond I expect that the company will pay until maturity. If I buy a callable bond wouldn't I expect to be compensated for the one sided exposure to interest rate risk I'm exposing myself to (rates go up I lose, rates go down I lose)? With consumer debt we have different expectations of what's fair, but consider the bank's risk profile here - if interest rates go up those outstanding mortgages are taking them for a ride, and if they go down the customers refi... seems natural they'd want to minimize prepayments.
    - analog31 6y ago
      In my view, the chance that a loan will be paid off early can be worked into the risk calculation that the bank uses for coming up with the interest rates and fees that they are willing to offer, and also for computing the cash value of the mortgage on the secondary market. At the end of the day, the bank just wants to know that they can sell the loan for more than it cost to originate it. An issue with consumer debt is that a proliferation of fees and "fine print" make it confusing for folks to understand what they're signing up for, and to do comparison shopping on loans. Traditionally, folks were advised to be wary of prepayment penalties because of a widespread strategy to prepay a loan if possible. When interest rates were high, this was like an investment with a guaranteed percentage return. For instance, my family took out a loan with a particular payment, but we paid more than the minimum each month because we could afford it. On the other hand, being able to drop back to a lower payment was a kind of safety net in case something happened to one of our jobs, or something like that.
- names_are_hard 6y ago
  Think of it like returning an item to a store and paying a restocking fee. Stores would prefer all sales be final, but where they allow returns, they prefer to charge for the service when they can. You bought a mortgage from the bank, now you want to return it. They want to charge you for that. See, the bank is not like your friend that lends you money. When your friend lends you money they are happy to receive payment early because they didn't actually want to lend it at all, it was a favor to you. They probably didn't charge interest, but if they did they did so because they "had to" (meaning they can't afford to lend you money as a flat out favor so they'll take the market rate, like when my friend the mechanic fixes my car but asks me to pay him because he's gotta live). When the bank lends money they _want_ to lend it, it's the whole point of their business. That's why they exist, to charge interest. When you pay back early you're reneging on the deal, so to speak, and defeating the purpose of the business. They don't want the money back until the agreed upon time, it throws a wrench in their plans, budgets, forecasts, etc. The fee covers the cost of this inconvenience and discourages you from doing so.
Xylakant 6y ago
It’s the same in Germany, it’s laid out in the mortgage terms. As a rule of thumb, you can pay up to 5% of the principal in a single lump sum every year on top of your usual payments directly reduces the principal at no extra fee. You can negotiate higher yearly extra payments, but that usually comes at the cost of higher interest. Sometimes you’re able to refinance at no prepayment fee, but that comes down to how hard the bank wants to keep you as a customer etc.
refurb 6y ago
Interestingly, the US has laws that limit pre-payment penalties to a certain set of mortgages. If you get a standard 30-year fixed, the mortgage company can't impose a prepayment penalty.[1] [1]https://www.nolo.com/legal-encyclopedia/when-are-prepayment-penalties-allowed-new-mortgages.html https://www.nolo.com/legal-encyclopedia/when-are-prepayment-...