Inspired by The Financial Samurai post, I decided to ask a similar question here: Should we use a part of our life happens fund and emergency savings to pay down a part of the mortgage?
Here is the situation.
After a few lump sum payments and 2 renegotiations of the mortgage, we now owe the bank money at a rate of 1,14%. Worst case, it can
double till 2,28%. Sometimes, the Belgian system is just cool. That same system does not allow me to increase the monthly payment or decrease the monthly payment. That can only at set moments. Ours is not due in 1,5 years. The only solution now is a lump sum payment.
Next to that, the current interest payments are almost fully covered by the tax advantage on the mortgage. In essence, you could say we have a 0 pct mortgage.
The cash would come out of our emergency fund and life happens fund. Not the investable bucket, not the travel fund. In the end, it is all cash on our accounts. Mentally, it is a different ball game. This money is currently yielding less than a 0,5 pct on average. This is not good.
Here is the plan.
I would like to pay off 10 000 EUR on the mortgage. This would bring our open amount just below the magical threshold off 100K. Our monthly payment would be 1003 EUR per month. Most of these arguments are purely emotional. Probably the worst guidance for a financial decision. I know! An extended plan would be to pay off 15 000 to lower these amounts even more.
This payback would not impact our fiscal advantage. So, we still stay at a virtual interest rate of 0pct
The monthly money saved would be directed back to a high yield savings account. These accounts come with some strict rules on how much you can put on each month and a loyalty bonus only due once a year if the money is there a full year.
The amber index would get an instant kick. It is derived of the 4 pct rule (Have 300 times your monthly expenses). Off course, this is a fake pumping up of the amber index. It will happen at a certain point in time anyway. And then for the full amount of the mortgage payment.
Next to the 100K and 1K threshold, there is also the advantage that I learn to live with less emergency and life happens fund. I am curious to see how we manage that. Today, we are having the amount that makes us sleep well at night. What if we stretch this a little?
We could put the money to work for us on the stock exchange in high yielding dividends or in an index. In the long term, this would yield 7-9 pct. With the current evaluations of the markets, I have a hard time to believe this. AM I timing the market? Maybe… As this money comes out of the mental emergency fund, this makes it even more difficult!
A derived alternative from this one is to wait for the market crash. I am not patient enough to wait for
The money could also be funnelled to a higher yielding account than today. Still then, this would be less than the interest paid on the mortgage. Or, we could funnel it in pieces to the high yielding account.
Or, we could do nothing. That is not me.
What do you think? Does this plan makes sense or is it totally a bad idea? What alternatives do you see?