I keep debt.

Being fully debt free is something that attracts me a lot. It allows me to minimize the monthly cash that I need. This will bring FIRE so much closer.  But having  debt is also a good thing. And for 2 reasons

Reasons to keep debt

In general and in the long run, the stock market should outperform a reasonable priced mortgage. The long term total  returns of the world stock market is often quoted between 5-7 pct after inflation. A well negotiated mortgage in 2015 should have a far lower interest rate. Imagine  you have 10K to pay back the mortgage, you will save a on interest during the remaining time of the mortgage. Or you could invest it in the stockmarket and get a potential higher return. Keep in mind: you need to have the time to reach the long term average. In between some serious downside risk is present. In Belgium, like in many other countries,  we have an income tax benefit of having a mortgage. You can get a tx dedcution of 2280 euro, per person (in our specific condition). This is a nice amount of money for having some debt. Especially if the tax gain of this is actually more than the interest you pay per year. With our mortgage, we will soon be in the situation where the tax benefit is more than the actual interest paid per year. So, we borrow at a negative rate. Great.

Reasons to repay debt

The market will crash! Maybe tomorrow, maybe next year. It can not be timed. Therefore, it is better to repay mortgages as soon as possible! Just joking…! As a passive index investor, I will invest each month in the market. But, given the current state of the markets, the ongoing conflicts and a potential GREXIT, I prefer to not deploy extra cash into the markets and repay debt. Next to that, we are well above the minimum debt amount that we need to get the tax advantage. there is thus some room to repay debt without loosing the tax benefits.

The plan

As we have some cash sitting around that does nothing, we decided to pay back a part of our mortgage. It is a long story, but we have some accounts that are excluded from the whole FIRE setup. They sometimes pile up cash… By paying back, our monthly mortgage repayment will reduce with 13 pct. Nice. This money will be used as from July as extra contribution to the F-Money. This extra monthly contribution should speed up the acquisition of some trackers. I look forward to see the results in our stats. How is your mortgage doing?

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6 thoughts on “I keep debt.

  1. We have debated whether or not to make additional principle-only payments a lot. In the end, we’ve decided against it because we actually plan on selling both of our homes when we move in a few years. Instead, we are letting that money that we would have used to make those payments simply continue to build in the stock market. Capital gains, baby! Capital gains. 🙂

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    1. Interesting to see how each mortgage story is different.
      We plan to stay here 15 plus year. This payment is supposed to be the last payment to our mortgage. We now are at the level of a monthly repayment that allows to save a significant part of our take home pay. This allows us to to DCA in index funds.

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  2. I have to admit, our mortgage is ridiculously huge – and we don’t even get the tax deduction benefits here in Australia! But it’s actually motivated me to work hard to earn more income, and to save more, so in a way it’s given me a greater focus and drive. I love putting every spare dollar I have to work in the stock market, so it definitely makes me work harder to create those surplus funds! And just can’t resist the opportunity investing brings vs the certainty of putting money back towards the mortgage.

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    1. Jason,
      Indeed, the opportunity of the stock market in the long run is also my driver to keeping this debt. And ofcourse, the tax benefit also helps a lot here in Belgium.
      Good luck with your investing. I am curious to see what all of your islands will deliver!

      AT

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  3. I am living in Brussels and I will pay in April my first mortgage. I studied the bank documents and my conclusion: at ING, for a first payment of debt next months with a value = 10% from credit I would reduce the total interest paid to the bank with… 8-9.000 euro. This is a good business! .
    I made more simulations in excel (like for every year payment of dept): but this payment down should be done in first years of mortgage, after 5 years it will be useless.
    But I don’t know how will affect the tax deduction related to the family mortgage .. so I need to speak with an accountant (or to ask the bank) to give me exactly numbers.

    (Thanks for the blog and all the info, I think it is very useful! Why I didn’t read you when I come in Belgium ?!?!?!? )

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    1. It can indeed be complex to figure out the impact on the tax deduction. There are actually many systems, depending on the year of your mortgage. We are in a no “older” system as they changed it last year.

      Glad the blog helps you forward.

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