The mortgage: we keep it

A while ago, I was considering paying back yet another part of our mortgage.  To me, being debt free, both good and bad debt if you want, is a something that appeals me a lot. Ever since I had mortgage, I would try to accumulate 10K to meet the minimum amount for a extra payment. A recent visit to a financial planner started the thought process again.

I do know there are limits and it does not make sense to be fully debt free. 

First, there are fiscal advantages in Belgium that make it worth while to have debt. In our case, to keep the fiscal advantage, we could easily half the outstanding principal we have and still be eligible the full fiscal advantage.

Second, the long term expected return of the stock market is likely to outpace your mortgage costs. The lower your rate, the higher of a change you have. Right now, I only see one problem with this idea: there are few believers that the long term average expected return of the last century will apply to the next 10 years. Why: Current valuations are high in a historical context. And yes, this is likely due to the historical low interest rates and free money being thrown at the market.

Here is our current situation

  • a very nice rate of 1,14pct, up for review in December 2017 and either way, capped at 2,28
  • As from fiscal year 2017 (income view), we will fall back on the basis fiscal advantage for the mortgage: 2280 EUR. This translates into a real cash advantage of approx 912 EUR.
  • Myself, I am not eligible for any fiscal housing advantage. I do fiscal long term saving
  • For the fiscal year 2017, we will pay 1087 in interest. We pay an extra 240 insurance.
  • Conclusion, we basically pay 410 EUR interest and insurance  for 2017 and less than 250 EUR in 2018.

Reasons to pay back

  • Peace of mind – debt free means more freedom. Given our overall financial situation and the cash amount we have, even emotionally, I feel less for this argument.
  • Fall under the magical limit of 1K mortgage payment per month. Emotionally cool, rationally, it does not make sense. Why 1K and not any other arbitrary number
  • As long as we stay above the fiscal maximum, we can achieve a negative effective rate. I think this is a fake reason as the fiscal advantage, we alredy have it today.

Reasons not to pay back

So, finally, I have come to peace with the idea (again) that we keep the mortgage “as is” for the next 8 years. That means, before my 50th birthday, I should be debt free.

Update on 17 Dec: The interest rates start slowly to go up. As we are capped and have seen a steep drop the last 2 years, I am not changing my opinion for now.

 

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26 thoughts on “The mortgage: we keep it

  1. Nice to see your reasoning, and clear conclusion. Seems like you are happy with the current decision, that is important. But at least you are keeping some options open, that is the main important thing. Situations change, flexibility is key!

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  2. Agree completely. I have confidence in the stock market and over 5-10 year periods you are likely to outpace the mortgage rate. The most recent 10 year period (including the great recession) still averaged a 6+% return. Agree with Team CF too, flexibility and maintaining optionality is key.

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  3. ATL, I think you’re wise to hold off on paying more toward the mortgage. With the low interest rate, and a cap, your “arbitrage” is favorable to invest the money. Also, once you put the money into the mortgage, it’s no longer liquid in the event of an emergency (or, opportunity, such as buying a rental investment).

    I once read it only makes sense to either pay off your mortgage in full (eliminating your monthly payment), or pay only the required monthly payment. Anywhere in between, and you’re tying up your liquidity without a real advantage.

    It sounds like you’ve made the right decision for your particular situation.

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  4. Hello ATL,
    Interesting analysis. Thanks for that.
    I can only recommend to keep the debt as long as it is assets backed and gives you a return much higher than the interest rate of the debt itself.

    My debts were to finance rented flats that I bought.
    I was very happy from the debt since I paid 3% to the bank to make 6-10% from the market based on each property specification. Recently I sold one of the property due to massive increase in prices to give back the loan of 3 properties 🙂

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  5. Even though keeping the mortgage makes sense mathematically, it still sucks. Having that debt hanging out there is no fun. It sounds like you’re making the right decision, but it doesn’t make it any easier to have to look at that balance every month. 🙂

    — Jim

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  6. I paid off my mortgage a couple of years ago after holding a mortgage for 7.5 years. When I reran the numbers I found out that if I had left it in the stock market instead of paying it off that the stock market would have performed 0.1% better. I know it just happens that’s what the market did but I figured I’d share what happened with my returns 🙂

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  7. Wise choice! With such a low interest rate it’s not worth it to pay it down. You get better expected returns elsewhere. If it helps, we have a 3.25% mortgage and don’t pay it down any faster than we have to. Cheers!

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  8. Definitely keep it. At the current rate and with the tax advantages it’s basically a 0% loan. I wish I could find more possibilities to loan money at or near 0%. My default calculation is always: can I find a boring and predictable company paying more in dividends than the interest rate? If so, keep the loan. Hell, if somebody was willing to lend me a 100 million euro for 100 years at 2,3% (http://www.standaard.be/cnt/dmf20160426_02258857) I would take that in a heartbeat: buy something paying 3% net dividend and live of the 700.000 euro difference for the rest of my life …

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  9. It is very well articulated and well reasoned rationale. Glad to hear that Belgium still incentivizes one way or another to own a house. What are you going to do with extra money? I also think is by putting (investing money) somewhere else you will get a better return!

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  10. Hi ATL! As a fellow Belgian, it was really nice to discover your blog. I’ve been reading some articles left and right, and it’s definitely a good read. Still quite new to the FI community, so a lot to learn still 🙂

    As others stated before, I can only agree that your choice to keep the mortgage is most probably the best option.
    1 question, though: why did you choose long-term saving over the fiscal housing advantage? Isn’t the fiscal bonus smaller in the case of LTS (30% instead of at least 40%)?

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    1. Thx for following along. Did you read the post on the Feb 4 meetup already?
      Due to my personal situation, I am not eligible for deducting my mortgage payments. When we bought the house, I did not meet the criteria. Hence, I defaulted to the LTS. So, it was not my choice, the rules choose for me…!

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      1. Hmm, Feb 4th is short-notice, but the idea sounds promising for sure! I should be able to make it to Antwerp, so if non-blogging FIRE newbies are allowed to join, I’ll try to come 🙂

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