One of the reasons I blog is that I can throw my sometimes crazy ideas into the world. The feedback I get is invaluable. Lately I got some feedback on having a mortgage, a pile of cash, and the need to refinance my primary mortgage when I buy a rental property. That had me thinking, and as regular readers know by now, I will begin to change my investment allocation and loan payoff from now on.
My Need For Financing
Currently, Girlfriend and I are living happily in my apartment in one of the large cities in The Netherlands. My need for financing is very small. The loan for my apartment is good for another five years, and I save approximately 40% of my net income. You could say I’m not a prime target for lenders.
That’s true. However, in the near future I would like to either purchase an additional apartment to turn into a rental, or move myself and rent out my current apartment. Both of those options would have me invest a sizable sum of cash. For both of those options, I don’t have the cash lying around right now. That means I need to finance quite something if I were to do this.
Because my current apartment is worth way more than the mortgage, it will be a great source of cheap capital when I decide to purchase something.
Mortgage As A Source Of Financing
If my mortgage will be a source of financing, I can just as well start putting money into it and in the meantime lower my payments a bit. The thing is that with my old strategy, I would have had a lot of cash parked in a bank account, earning almost no interest.
When I start paying down the mortgage, that increases the amount I am able to borrow in the future. It also lowers the payments I have to make today. So that’s a win without any downside basically. I am aware that mortgages aren’t that liquid, however, I am fully aware that I will probably leverage my apartment anyways if I am going to buy a rental, or even something else.
In a way, you could say I would be treating my mortgage as if it were a home equity line of credit.
I Still Be Invested In The Stock Market
Don’t you worry, I won’t abandon my stock market investments at all! Even better, I just put in a couple thousand euros because of the liquidation of my cash fund!
In my new investment strategy, I will still be putting money into VWRL and IUSN through my account at DeGiro. After all, investing in low cost index funds is one of the easiest ways to build serious wealth.
Right now I won’t be adding any more money into peer to peer lending than the 4,000 euros I put in each platform already. I’ll let it sit for a while to experience how things work. So my money will be divided between stock index funds and my mortgage (where previously it would be divided between stock index funds and cash).
Asset Allocation Going Forward
For the foreseeable future, I will be putting in money in my stock portfolio and my mortgage at a 50/50 allocation. Every month, I save about a 1,000 euros, including bonuses and incidental income. I will not be investing 500 euros and putting 500 euros towards my mortgage.
No, what I’ll do is combine the principal part of my regular mortgage payment and add that to my savings. Currently, the part of my monthly payment going towards principal is around 460 euros. Assuming a month with 1,000 euros of savings, I will have a total of 1,460 for investments into the future.
Of that money, I will use half for investing in the stock market, and half to put towards the mortgage. That means that I’ll be putting 730 euros in the stock market, still in a 90/10 allocation between VWRL and IUSN. The other 730 euros will go towards the mortgage. Now remember, my regular payment already includes 460 euros, so an additional 270 euros will go towards the mortgage.
This new strategy will resemble my old strategy, but it will be swapping out the cash savings with paying off the mortgage a little bit faster. Currently, if I pay an additional 270 euros my monthly payment will go down by 1 euro. This isn’t much, but every little thing helps. Now it’s time to let that snowball grow bigger and bigger.