How much do you earn on your credit?

Interest rate is one of the most important features while taking a home loan. It has a direct impact on the total amount you have to pay as well as your monthly payments. As we see rates fall in early 2024, let’s look at the direct implications this could have on your portfolio.

Interest Rates and Monthly Payments: What You Need to Know

The interest rate is expressed as an annual percentage.

Let’s take the example of a mortgage loan of 200,000 euros at 4% or 3% over a period of 20 years.

In our example, we will take a fixed rate loan. We are going to compare two fixed rate home loan offers:

• A loan of 200,000 euros at 4% over 20 years
• A loan of 200,000 euros at 3% over 20 years

As a reminder, a fixed rate ensures that the interest rate will not change throughout the loan period, unlike a variable rate that fluctuates according to market conditions.

If rates move in your favor, you may want to consider renegotiating your credit with your bank or considering a credit buyback by doing our simulation.

Calculate your monthly payment

When you want to take a home loan, you need to know the monthly repayments you will have to make. The monthly payment is made up of two parts: the capital borrowed and the interest paid to the bank.

The formula for calculating the monthly payment is as follows:

1. Divide the annual rate by 12 to get the monthly rate
2. Multiply: Loan Amount x Monthly Rate
3. Divide the result by (1 – (1 + monthly rate) ^ (- number of monthly payments))

Calculation example for a loan of 200,000 euros at 4% over 20 years

In our example, here’s how to calculate the monthly payment:

1. Annual rate / 12 = 0.04 / 12 = 0.003333
2. 200,000 * 0.003333 = 666.67
3. 666.67 / (1 – (1 + 0.003333) ^(-240)) = 1216.96 euros

Thus, with an interest rate of 4%, your monthly payment will be 1,216.96 euros.

Calculation example for a loan of 200,000 euros at 3% over 20 years

Similarly, for a loan of 200,000 euros at 3%, here is the calculation:

1. Annual rate / 12 = 0.03 / 12 = 0.0025
2. 200,000 * 0.0025 = 500
3. 500 / (1 – (1 + 0.0025) ^(-240)) = 1103.33 euros

Thus, with an interest rate of 3%, your monthly payment would be 1,103.33 euros.

Savings at 3% over 20 years instead of 4% between loans of 200,000 euros

As we saw earlier, the difference between the two monthly payments is:

1216.96 – 1103.33 = 113.63 euros per month

This difference may seem small, but over the life of the loan, it represents a significant savings.

To calculate these savings:

1. Calculate the difference in monthly payments over all installments: 113.63 * 240 = 27,271.20 euros
2. Calculate the total interest expense for each loan:
   • Total cost of credit at 4%: 240 * 1216.96 – 200,000 = 92,070.40 euros
   • Total cost of credit at 3%: 240 * 1103.33 – 200,000 = 64,799.20 euros
3. The difference between the two total interest costs: 92,070.40 – 64,799.20 = 27,271.20 euros

So, in this example, by availing the loan at 3% instead of 4%, you will save 27,271.20 Euros Throughout the payment period.