UVR vs. Pesos: The Inflation Gamble in Colombia

In Colombia, there are two ways to get into debt for housing: in Pesos (fixed rate) or in UVR (Real Value Unit). Banks often offer UVR because the initial installment is lower, which allows you to "qualify" for a higher amount. It's a trap. This option might seem attractive at first, but it exposes borrowers to the risks of inflation, which can lead to a significant increase in debt over time.

The Problem: The Debt That Grows on Its Own

UVR is tied to inflation. If inflation rises 10% in a year, your debt balance (in pesos) rises approximately that same percentage, before your payments are applied. We have seen dramatic cases: people who borrowed 200 million pesos, paid dutifully for 5 years, and today owe 220 million. This situation occurs because the UVR adjustment is applied to the outstanding balance before any payment is made, effectively increasing the amount owed. As a result, borrowers may find themselves paying more over time without making significant progress in reducing their principal debt.

The Agitation: Running on a Treadmill

Being in UVR is like running on a treadmill that keeps going faster. If inflation skyrockets, your installment goes up and your principal doesn't go down. It is financially exhausting and psychologically devastating. If you have a UVR loan today, you are exposed to the country's macroeconomic volatility. You are not in control. This lack of control can lead to significant stress and financial insecurity, as borrowers may struggle to keep up with increasing payments without a clear end in sight.

The Solution: Amortize or Portfolio Purchase

You have two emergency exits: 1. Portfolio Purchase (Refinancing): Move your debt to Pesos (Fixed Rate). Even if the installment is higher, you will know that it will never go up and that every peso you pay will lower the real capital. 2. Aggressive Amortization: If you cannot switch to Pesos, you must make extraordinary payments to capital urgently. In UVR, amortizing capital is the only way to stop inflationary indexation. Every million you pay today stops growing with inflation tomorrow.

The Simulation on Amorti

Visualize the impact of exiting UVR. To do this, follow these steps:

Take your current statement (Balance in Pesos).

In AmortiApp, simulate that balance as a new loan with a fixed rate in Pesos (e.g., 13% E.A.).

Compare that stable projection with the uncertainty of your current loan. If you have extra money, use it to kill the UVR. It is the best defensive investment you can make in Colombia. Don't let inflation eat your wealth.

Understanding the Impact of Inflation on UVR Loans

To better comprehend the risks associated with UVR loans, consider the following example: - Suppose you borrow 150 million pesos at a UVR rate. - In the first year, inflation is 8%. Your debt would increase to approximately 162 million pesos before any payment is applied. - If your monthly payment is 1.5 million pesos, you would pay a total of 18 million pesos in the first year (1.5 million * 12). - However, due to the UVR adjustment, only a portion of your payment would go towards reducing the principal, while the rest covers the interest and the inflationary increase.

Key Takeaways

- UVR loans are risky because they are tied to inflation, which can increase your debt over time. - Fixed-rate loans in Pesos provide more stability and control over your payments. - Amortizing your debt is crucial in reducing the principal amount and stopping the inflationary indexation. - Simulating your loan with tools like AmortiApp can help you understand the benefits of switching to a fixed rate or aggressively amortizing your debt.

Making Informed Decisions

When considering a loan for housing in Colombia, it's essential to weigh the pros and cons of UVR versus fixed-rate loans in Pesos. While UVR loans might offer lower initial installments, the potential long-term costs due to inflation can be significant. By understanding how UVR works and the impact of inflation on your debt, you can make more informed decisions about your financial future.

The Importance of Financial Planning

Financial planning is key to navigating the complexities of borrowing in Colombia. By creating a comprehensive financial plan, you can better manage your debt, make strategic decisions about your loans, and work towards achieving your long-term financial goals. This includes considering options like refinancing to a fixed rate, aggressively amortizing your debt, and seeking professional advice when needed.

Conclusion

The choice between UVR and Pesos for housing loans in Colombia is not just about the initial installment; it's about understanding the potential risks and benefits associated with each option. By recognizing the dangers of UVR loans, particularly their tie to inflation, and exploring alternatives like fixed-rate loans or aggressive amortization, borrowers can make more informed decisions that protect their financial well-being. Remember, don't let inflation eat your wealth; take control of your debt today.