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
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 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).