This week I finally did it. I signed on the dotted line, and promised the bank that I will pay them back a crapload of money. I have been busy refinancing my apartment.
After all the considerations, spreadsheets, and thinking I knew this is a good idea. When you see the official paperwork, and the amount you owe, it’s a different feeling. Suddenly it seems like a lot of money. However, I guess a lot of people wouldn’t consider the mortgage I took out as a high mortgage.
So what did I do? I refinanced my original mortgage on my apartment into a lower rate, essentially bringing the real interest towards zero, for the next 6 years. Next to lowering the rate on my current mortgage, I took out an additional loan to have money available for investments.
Including the actual money I took out, my total monthly interest payment went down! So basically the bank is paying me to give me money. That is one of the wonders of personal finance, sometimes you can engineer a situation like this. You can read all the details here.
Dutch Real Estate
So the Dutch real estate market is crazy hot as we speak. We’re nowhere near London or Paris levels yet, but the larger cities (Amsterdam, Rotterdam, The Hague, Utrecht etc) are appreciating fast. After the financial crisis we had quite a few years where the market was depressed. From 2014-2015 on prices began rising but very slowly. In 2017 it seems the rocket was ignited, and (especially urban) real estate went to the moon.
In most areas of the country we are past the 2008 peak of the market. Some more rural areas are lagging behind. Even though the economy is booming, people are leaving the countryside to live and work in the cities.
I bought my apartment late 2015. In hindsight, that was a very good time to be buying. Really all it was was luck, but I have heard people say luck is when preparation meets opportunity.
The unit I bought is a beautiful 2 bedroom / 1 bathroom apartment close to the city center (7 minute bike ride) in one of the four largest cities. It was recently built in 2013 so everything was brand new when I moved in.
When I bought my apartment, it was possible to finance 103% of the purchase price of a home. Whether this is good financial practice or not, I did it to cover part of my closing costs. I got a loan for 1.90% before tax deductions so I figured I could better borrow more money instead of taking money out of investments to put a down payment on the apartment.
The crazy mortgage insurance like the US sees for high LTV (loan to value) mortgages don’t exist in The Netherlands. Banks require you to insure the mortgage against death, and only for the part over 80% LTV. I paid € 3.75 per month for this insurance, so no there was no problem there.
My Old Mortgage
Actually, I took out two mortgages when I purchased my apartment. The larger of the two was trough an online bank, where I financed the bulk of the purchase (about 96%) and the remaining 7% I financed through the local municipality. Here in The Netherlands some municipalities are actively targeting recent graduates to move to their city, so they give out these “starter loans” to help them finance a home.
The first three years the interest rate is 0%, and there is no amortisation. After three years, the interest rate is fixed for 15 years at a certain rate, and then a 30 year amortisation kicks in.
The rate on my first mortgage was 1.90% before tax deductions. The rate on the starter loan was 3.40% but I refinanced before it kicked in. Basically I borrowed money from the government for 2.5 years without paying any interest whatsoever.
I used to pay around 580 euros per month in principal and interest combined, of which the interest payment was slowly lowering every month but made up around 235 euros. This is excluding the starter loan. That would have been about 25 euros per month in interest after the third year.
So with all the crazy real estate going on around me, I noticed that my neighbours were selling their apartment. The floor plan was exactly the same as mine, only their kitchen and bathroom were a little more premium than mine. However, was stood out the most was their asking price. They wanted 220,000 euros for their place! I bought mine for about 160,000…
They sold within a week. Luckily, our government makes a lot of information related to real estate open to the public. For 2 euros you can get the actual price for which a house was sold from the government. Since I was already planning a refinance, I did this. The actual sales price was 245,000!
This appreciation made it possible for me to refinance into a lower rate and get some capital out.
The New Mortgage
The loan I took out for the refinance is for 187,500 euros. That keeps me slightly below 80% loan to value, meaning I get a super low interest rate of 1.40%.
My new mortgage consists of two parts. The first part is to pay off my existing loans, both the bank loan and the starter loan I got from the city. This first mortgage is for about 158,500 euros.
The second mortgage is the one that I actually take out to invest. That one is worth almost 29,000 euros. From this second mortgage the costs such as from the notary and the loan arrangement fee are paid, so I received a little less than 29k.
Part of the fees is tax deductible, so next year when the tax returns are coming I expect to receive back around 800-1000 euros.
Why This Was a Good Idea
So a lot of people will say taking out loans to have capital for investments is a bad idea. Generally I agree with them, but in this case I honestly believe this will work out pretty fine.
Be aware, the follow section contains a lot of numbers. Nerds will be happy.
Comparing Before and After
So when comparing the before and after scenarios, we would want to look at the interest I was paying on my original loans and the interest I’m paying on the new ones. If we compare those, we get the following result.
Straight Forward Calculation
|Amount||Interest Rate||Yearly Interest|
As you can see, when looking just at the raw interest rates, I’m actually getting paid by the bank for taking out additional capital.
Of course, the world is never as straight forward as this. We have to take into account tax deductions on the interest paid, as well as the net fees for refinancing. If we incorporate those, we get.
|Amount||Interest Rate||Yearly Interest||Remarks|
|149,800||1.14%||1,708||Applied 40% deduction|
|8,700||2.04%||177||Applied 40% deduction|
|158,500||0.85%||1,1331||Applied 40% deduction|
|29,000||1.40%||406||No deduction on secondary mortgages|
|29,000||-0.51%||-148||Less profit but still the bank pays me while handing over money|
|Net interest saved over 6 years (fixed rate term)||-888|
|Net refinance fees and costs||1,200|
|Total net costs||312|
|Net costs per year||52|
|Yield on 27,800||0.19%|
|Break even 2nd mortgage||1.46%|
That means that I have to make a very easy 0,2% interest on the money to brake even with my original mortgage after taking into account the tax deductible interest and the refinancing fees.
Break Even Calculations
Looking at the break-even point for the secondary mortgage, I’d have to invest and yield at least 1.46% to break even on the interest on the secondary mortgage. The interest on secondary mortgages, even if they are secured against your primary residence, are not deductible in The Netherlands so I have to make up for the full 1.40%.
Because there are costs involved in refinancing, I can only deploy 27,800 euros and have to cover 1.40% on 29,000. That is what causes the slightly higher figure of 1.46% (1.40% x 29,000 = 406, 406 / 27,800 = 1.46%).
Also this will be more than possible. Over the long term the stock market yields around 7% after inflation or 9% before inflation, so I don’t see any problems there. Of course, there’s always the sequence of returns risk but with these little interest payments I’m not really afraid.
Worst Case Scenario
The worst that can happen is that during a market crash both my stocks and apartment decline 40% in value. In that case I will simply have to stay put. Making the monthly payments will not be difficult, but for example moving would be a little bit harder. Anyway, I will still have my emergency fund in case things go south.
With the money in the bank as of last week, everything I wrote about on Ontsladebaas.nl about this topic is now finished. The money will be deployed according to my regular investment strategy. Of the total sum I will keep on half in cash, and invest the other half in the world economy through VWRL and IUSN.
Do you consider refinancing your property too? What are your thoughts? Please let me know in the comments below.