Repayment vehicles

from Wikipedia, the free encyclopedia

As repayment vehicles (including clearing agreements called) forms of savings and investments are called, which are used to a bullet loan to pay off. Bullet loans are loans where repayment is suspended for the entire term of the loan. So only the loan interest is paid, the final repayment then takes place via the repayment vehicle.

Various types of investment options can be used for this purpose:

The repayment vehicle is concluded with the aim of achieving a higher interest rate than has to be paid for the borrowed capital for the bullet loan . This increases the capital in the repayment vehicle faster than the capital owed is repaid.

At the end of the term, there should be more capital available than is necessary to repay the loan debt. This safety surcharge should be chosen at 10 to 30% in order to prevent unforeseen reduced yields.

Repayment vehicles are mostly long-term investment products with a term of between 10 and 25 years. Therefore, securities with larger fluctuations can be used at least for the first half of the time. Towards the end of the term, it makes sense to switch to lower-risk investment options step by step in order to secure the income that is already available. It is necessary to consider this possibility when selecting a product.

Under certain circumstances, it can make sense to create a one-off payment (e.g. 12 monthly installments) at the beginning of the repayment vehicle in order to use the compound interest effect from the start. It is sensible and possible to save a repayment vehicle without a loan debt if you plan to make an investment in the near future for which a bullet loan is to be used. This improves the prospect of having the required capital available at the end of the loan term, as well as the position vis-à-vis the lender. In the case of banks, the choice of the repayment vehicle should be agreed with the advisor.

It is particularly important to pay attention to the partially hidden costs of the product, which are deducted during the term. In the case of investment funds this is the management fee, in the case of life insurance it is the share of the insurance costs, the fund costs and the management fees. Depending on the product selection, taxes may also be due.

Investment funds

  • Equity funds - high fluctuation ranges, good earnings opportunities.
  • Guarantee fund - only suitable to a limited extent as a repayment vehicle, as guarantees cost part of the income.
  • Fund of funds - additional risk minimization usually costs considerable parts of the income.
  • Index funds - if several large global stock indices are used as a basis, an inexpensive option.
  • Hedge funds - here there is a risk of total loss of capital, so only suitable as an admixture (5 - 10% of the investment).

Share portfolios

They require a lot of time to maintain and select the securities. The tax treatment is disadvantageous compared to life insurance. If a custodian with low costs is selected, this is the variant with the highest possible income.

Classic life insurance

If these are purely on a bond basis (bond basis), then the expected return is not very high. The range of fluctuation is small or nonexistent, depending on the design. Only suitable as a repayment vehicle if very low earnings expectations are sufficient to repay the capital owed. In principle, life insurance is only recommended as a repayment vehicle if serious tax effects are to be expected.

Unit-linked life insurance

Consisting of stocks or a mixture of stocks and bonds, the expected returns are usually sufficient. This choice is tax-efficient and is mostly chosen by financial advisors, as in this way an additional product can be sold with a large bonus for the intermediary. Here there is usually the option of making early withdrawals towards the end of the term, or switching to risk-free bond or money market funds. The insurance portion should be set as low as possible for a repayment vehicle, as the insurance costs a lot of the income.

Other savings products

Such as insurance savings products, 10-year building society contracts, etc.

selection

When deciding on a particular species, it is particularly important to be clear about the following points:

  • Personal willingness to take risks
  • Financial situation
  • Expected yield
  • Time required to update the assessment during the term
  • Tax situation and tax consequences of choosing a particular assessment

The following example calculation reflects the capital development with a regular payment of € 100.00 per month and an interest rate of 5.00% / p. a. contrary.

Payments in 25 years:

€ 30,000.00 + interest income € 28,823.58 = gross income € 58,823.58

The compound interest effect produces the highest income towards the end of the term. Bullet financing with repayment vehicles can only be successful if, on average, the return on the repayment vehicle is significantly higher than the interest on the loaned capital. It is possible to secure the interest to be paid with the help of interest caps at a certain level. (for example a maximum of 3.0% interest on borrowed capital)

When selling, the risk potential of some fund sectors is often not pointed out accordingly. It is essential to pay attention to how a corresponding fund is allowed to invest and not how the name might suggest. In the sales prospectus you can find out more about the possibilities of how a fund can invest.

Most of the repayment vehicles are only recommended for people who are experienced in this area due to the tax treatment. In particular, it should be noted that in Germany, for example, with some products, capital gains tax may be due upon payment. Professional advice is essential for inexperienced investors . For investors who do not know very much about their own financial situation, even professional financial planning should be considered.