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.
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
- Keep the cash for an opportunity in a rental. On a regular basis, I do look around for properties to buy, in our town or neighbouring towns. Maybe, one day
- On our todo list for the house, there is still the kids shower room, outdoor lightning and maybe a new master bathroom. The cash needs to come from somewhere.
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.