Buying financed property is already part of the Brazilian culture. But it should not be so. Our base interest rate is one of the highest in the world. This is very bad for those who need to finance their own consumption and great for those who invest money to consume in a planned way.
The base rate in the US is 0.25%. In the Euro zone it is 0.5%. In Brazil, we are 8.5% and rising. This means that money in Brazil is very expensive. There are no low-risk financial investments in the world that pay such high real interest rates. There is also no place in the world where banks charge so dearly for the money they lend.
Real estate financing
Let’s assume you plan to finance a $ 200,000 apartment. The bank will finance 90% of this amount. Then you will need $ 20,000 down payment and income to finance $ 180,000 in 420 installments (35 years). I made a simulation on the Luck Global Bank website and found that the $ 180 thousand would turn into a debt of $ 494,726.05 with CET (Total Effective Cost) of 9.8553% per year. This means almost 3 times the amount borrowed (2.74 times).
Let’s say you chose to continue living in your parents’ house. The $ 20,000 you would give up in the funding would be invested. The amount of the monthly installments would also be invested ($ 1787.71). If you achieved a profitability of only 0.65% per month it would only take 6 years and 2 months (74 months) to reach $ 201,496.59.
In practice, you would only have saved $ 152,290.54 and the othe$ 50,993.76 would be the result of compound interest paid on the investment.
You pay $ 20,000 down payment + $ 494,726.05 to the bank for the 180,000 loan, and you get a $ 200,000 apartment in return that will only be yours when you repay the debt 35 years from now. At the end of this period you will have an old property and probably no money in the bank.
Property bought in sight
You invest $ 152,290.54 ($ 20,000.00 + 74 installments of 1,787.71) and purchase the property of 200,000.00. The money you would spend for decades paying interest would be invested to keep you earning interest. By the end of 35, you would have an old apartment, but a lot of money invested. And what would happen if you did not buy the property and did not stop investing the $ 1,787.71 monthly for 35 years yielding 0.65% per month?
You would become a millionaire man with $ 4,208,877.32 invested. That would save you $ 770,838.20 in 420 installments of $ 1,787.71 and $ 3,439,826.83 in interest earned over this entire time. The blue line shows how much you would spend paying off 180,000 financing over 35 years totaling $ 494,726.05. Already the red line shows how much you would earn if you invested the amount of the first installment of financing over 35 years receiving 0.65% interest per month.
Want to learn more about this subject?
Recently I launched an eBook called “Black Book of Real Estate Financing”, where I show why real estate financing is the largest impoverishment mechanism of Brazilians. The recent increase in population income was of no avail as most of them committed this income to the payment of interest on car and real estate financing.
In the book, I present alternatives to those who do not want to go into debt for 35 years to buy their own home. You will find that it is possible to buy cars and real estate without depending on banks, without having to get into debt, without proving income and begging a vote of confidence in financial institutions.