In recent years, when interest rates for a loan as well as for savings deposits were still at a much higher level than currently, those who were interested in a loan, was often offered by the banks a so-called “final loan”. In particular, if the purpose of borrowing was the acquisition of a property. Especially in the case of real estate financing, the “final loan” was the form of financing for long years. However, in recent years, this type of loan has fallen behind in the financing of a property and has been replaced by the classic installment loan. But why did this change take place? The reason for this is the construction of the “final loan” or its absolute dependence on the interest rate situation on the capital market. Let’s take a look at the credit market for a better understanding.
The final loan: what is it?
In simple terms, a final loan is defined as a combination of a non-repayable loan and a savings plan to build up capital. In General, it is a Fund-based savings plan or the capital structure of life insurance. The prerequisite for a final credit model is that the maturity of the loan is absolutely consistent with that of the savings plan. In the practical application of the final loan – for example in the Form of a real estate loan – the required loan amount is taken up and provided by the Bank, but not as with an annuity loan (installment loan), repaid monthly with fixed rates. The loan-granting Bank receives only the monthly interest on the loan, whereas the actual loan rates are paid into the fund or savings plan. Thus, the loan rates are used to build up capital and interest income, paid out shortly before the end of the loan period and then the loan is repaid or repaid with this sum. Basically, this is not a bad model, but it only works if the interest rate situation on the capital market also allows a corresponding interest rate on savings deposits of at least 3-4 percent.
The disadvantage of the interest-only loan
The term of a loan that is often shortened compared to a classic instalment loan with a final maturity loan only works under certain conditions. Namely, when the return on the savings contract is higher than the interest rate disadvantage resulting from the lack of repayment settlement during the interest-only loans. Thus, as already mentioned in the previous paragraph, a certain minimum return must be achieved. At a time of low interest rates, this is an almost hopeless project. The result would therefore be that the minimum return on the savings contribution is not achieved and the final loan is therefore clearly detrimental. If the interest rate disadvantage is higher than the yield of the savings contract as a result of the non-repayment settlement, the annuity loan (installment loan) is the economically more sensible Alternative.
Long-term interest rate lows lead to mature credit ad absurdum
Thus, if the interest rates for savings deposits are at a historical low level, as is the current Situation, the operating principle of the final loan cannot arise. For years, the ECB has been pushing down the so-called key interest rate ever further, which means that saving is simply no longer worthwhile due to barely realisable interest rate gains. Thus, the offer for final loans (for the time being) is once at the end.