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Thoughts on Investing and Paying Off My Mortgage

A lot is changing in the world of personal finance these days. Stock markets are very volatile, the American Fed and European ECB are lowering interest rates again, and there will be more uncertainty about various economic numbers. I have always said I won’t pay off my mortgage anytime soon, but does that thought still hold?

Investing Comes First. Always.

In my world, where I have a 1.4% mortgage, investing comes first. At all times. It simply didn’t make sense for me to pay extra on my mortgage. With inflation targets above my interest rate, I would be stupid to pay it off, right?

Well, not so quick Mr. B! Yes, from a purely mathematical point of view, paying off a nearly free loan is kind of stupid. Especially when that capital can be used to generate higher returns somewhere else. This phenomenon is called “arbitrage”.

I have used arbitration by increasing my mortgage a year ago. I refinanced my apartment and took almost 30,000 euros of capital out of my home. Because the interest rate dropped from 1.9% to 1.4%, my interest payment including the 30,000, went down.

With all of this free money, I was now able to invest freely and make way more than that 1.4% I’m paying. Lots of people called me crazy. Some people, myself included, thought it was a genius move.

More Than Just Investing

But there’s more to this (financial) world than just investing. There’s also a thing called certainty. Certainty is knowing what the future will hold. The future is very uncertain right at this moment. Brexit can wreck the stock market. Interest rates can be kept low for the foreseeable future, risking an even more inverted yield curve. Trump can spiral us into a new recession through a trade war with China. Who knows?

With these risks, it’s wise to have some capital available in cash. At the moment, I do hold cash, which is part of my investment strategy right now. I hold cash because I would like to be able to purchase additional real estate, while not risking a down stock market when I need to cash out for a down payment.

Another way to lower the risk in your portfolio is by deleveraging or paying off debt. Now, luckily, I don’t have any toxic debt. My credit card is paid off every month. I have a mortgage at just 76% loan-to-value. On top of that, I have almost 7,000 euros worth of student loans with a 0.01% interest rate.

Paying Off My Mortgage

So, will I be paying additional towards my mortgage in the near future? I’m not sure. I took out the additional mortgage because I wanted to make use of cheap capital. The arbitrage alone should earn me quite some money coming from the return of my stocks investments and peer to peer lending.

On the other hand, if I want to purchase investment real estate, it makes sense to make my balance sheet look a bit better. And paying down loans is definitely a way to do so.

I promise I won’t start paying massive amounts towards my mortgage today. But, I’m seriously considering it.

Current Investments and Mortgage Payments

Currently, I’m paying about 460 euros every month towards my mortgage. This is because the loan is a simple annuity, this is what I’m paying towards the balance automatically.

Investments-wise, I’m putting away roughly 1,000 euros per month if I include the average of my yearly tax-return and bonuses.

That means that I’m adding roughly 1,400 euros per month to my net worth. About one-third of that is going towards my mortgage, the rest into investments.

Right now, I think the chances of my running into an investment property that’s reasonably priced are slim. That means that most likely, my first ever real estate investment will be my apartment, that I intend to rent out when I buy another home.

Following that logic, I might as well pay off small amounts towards my mortgage, while I keep investing. In order to rent out my apartment, I do have to lower my loan-to-value anyways so whether I fund that with investments or paying off my mortgage is irrelevant.

Downsides to Paying Off My Mortgage

There are a few downsides to paying off my mortgage. One of them is that I will have a little bit less liquidity than I would have when I were to invest the money into my cash and stocks portfolio.

Another downside is that potentially, I would earn less money in total. Right now I’m fully leveraging the arbitrage opportunities from borrowing money at 1.4% and potentially earning more than that in the stock market and peer to peer lending.

However, I won’t be paying off massive amounts immediately. At my bank, the minimum additional payment is 250 euros, and that is a nice amount to pay off because it would bring my investment and mortgage payments to roughly 50/50.

Crowdsourcing Knowledge

Crowdsourcing knowledge is one of the advantages of having a blog. I’m going to be straightforward here: what do you think? Let me know in the comments below or via Twitter (@firethebossEU).

7 thoughts on “Thoughts on Investing and Paying Off My Mortgage”

  1. Hi B,

    Reconsidering paying of your mortgage is a nice evolution of your plans. With the new Dutch tax laws and the increasing of the wealth tax in mind a rather good option. By lowering your expenses, you require less roi and the wealth tax will have less impact on your future plans.

    Reply
  2. Using logic, it should be obvious what to do – but we tend to use our emotions quite often, to make important life decisions.
    Having low- or limited debt simply feels good. I currently opt for a mixed solution, where I only pay 50% of what I actually should be paying on my mortgage. This means that when the loan term is finished, I will still have a substantial amount of debt to repay. – But by then I will be rolling in cash from all my investments, so who cares? :P

    Reply
    • Sounds like a plan! And if and when interest rates shoot up you can always start paying more, no?
      With my mortgage, I’ll have 20% left 25 years from now and the rest is gone 29 years from now, without paying extra. It’s just two annuity loans.

      I’m currently outlining an article explaining what I’m going to do, since I’ve drawn some conclusions after long thoughts and deep discussions (and comments such as yours!)

      Thanks for stopping by!

      Reply
  3. Not sure how big the buckets of money in investments and cash are exactly. But to me it seems strange that you have taken equity out of your home for which you can’t deduct the interest from tax, and at the same time have a large pool of dead cash and not fully invested it.

    I would either make the jump into real estate and pour both the cash and some sold stocks/crowdfunding money in it, and leveraging that with a mortgage.

    Or pay off some of your own mortgage with the cash to get to the lowest LTV ratio (60%?) and reduce the interest rate on all mortgage parts. Don’t sell stocks, as you can’t predict the market and it is better to get used to market swings in the early phase of building your portfolio.

    Personally I have cut my new monthly stock investments in half since a few months, to increase my cash buffer from around €10k to €30k. This is because I have a recession sensitive job and unemployment benefits only pays a maximum of 40% of my current net income. Finance is very personal!

    Reply
    • Thanks! Your comment makes sense, although in my situation the cash also made sense. I am drafting an updated strategy and will write an article about that soon-ish. Stay tuned and thanks for helping me think through this!

      Reply

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