About Loans with Fund Savings
Various banks, and in particular the major banks, have in recent years marketed that customers can get repayment on their loans by putting the installments into one of the funds the bank sells. This is what banks call housing-funded savings. The idea is actually quite simple and it can be good in the long run.
A mutual fund will give you a better return
Thus, the customer will be able to earn 0-3% of the saved amount each year. Instead of paying off the loan, the customers put the money they would have paid off into a fund. The cost is the borrowing rate, the income is the return on the stock market. In the long run, it is very likely that the stock market will yield better returns than the mortgage rate. Therefore, the expectation is that this is profitable, but it is not risk-free at all.
The scheme is not a focus of focus. Paying off loans is saving. Instead of saving by repaying the loan, you save in something else. However, if you opt for installment relief and instead save in equity funds, you must be aware that you are financing your equity savings loan. And you also have to be aware that banks’ arguments are not always entirely fair. You often operate with fantasy returns in the stock market.
That way, this may look better than it is.
It is the historical excess return in the stock market that you can expect to earn in the long run. It is 4-6%. This is what the stock market has historically given on average more than society’s risk-free interest per year. The loan interest rate is often 1-2% above the risk-free interest rate. In addition, the costs of the equity fund will also eat up.
The costs of a mutual fund are on average around 1-2% per year. Thus, there are 0-3% you can expect to earn annually. Let’s take an example: You have a series loan of 1 million over 20 years. This means that you will initially pay NOK 50,000 in the installment per year.
We imagine that instead of paying installments
You put the installment money into a mutual fund. Thus, your loan balance will always be in millions, but you put 50,000 in equity funds per year. Let’s imagine that you get an average development with 2% excess return per year. Your profit after 20 years will thus be about 215,000 kroner. It is not at all bad considering that you have spent borrowed money in the stock market.
You do not need to buy banks’ compound products in this area. You can fix it yourself. As long as the bank gives you the repayment allowance, you can use the repayment money for other savings. But you have to bet on risky instruments. You need to find a savings form where you can expect the return to be better than the borrowing rate in the long run. If not, this arrangement is meaningless. The most obvious alternative is shares, either mutual funds or individual shares, or a rental apartment.
We believe this is suitable for those who can take risks and have a relatively generous economy. Two rules of thumb may be that your loan must be secured within 60% of the value, and that you can withstand a sharp rise in interest rates or that the fund’s shares will decline in value over a period of time.