OK, I'm hoping this question will interest some of the people who enjoy running calculations, because I'm finding that coping with all the variables is taxing my otherwise-logical brain. I'm trying to figure out how big of an emergency our mortgage is and develop the best strategy for paying it off.
Here's a brief background before I get into numbers. We're a family of five (parents in our mid-40s, three kids under 16) originally from the U.S. but now living in Europe. All except one member of the family has dual citizenship. We live in a small, pleasant city within walking/biking distance of everything. We employ a lot of Mustachian principles in life and lived entirely debt-free for years, until we finally purchased a condo six years ago. Now this one (large) debt is weighing heavily on my mind, especially because I've only recently had my eyes opened to the idea that being more conscious about our saving and financial planning will lead to a better future for all of us.
So, onto the details of the loan itself. We made what was possibly a poor choice to take out a loan in Swiss francs (CHF) even though our earnings are in euro (EUR). This was a popular financial move in several central and eastern European countries in the years up to 2008 because the CHF interest rates were significantly lower than EUR ones, and it was widely believed that the exchange rate between the two would not vary enough to make the exchange rate risk a huge limiting factor. (Also: all loans available in either currency were ARMs; only in the past couple of years have they started offering fixed-rate loans.) Well, once the financial crisis hit things started looking a lot different, and the major exchange rate changes have led to people having problems with these loans, ending up underwater and having higher monthly payments than they can afford. We've had no trouble affording our monthly payments, but I'm definitely uncomfortable with the situation especially now that I'm thinking it would be nice to pay off the loan early. (My perspective on long-term debt has changed a lot since we took out the loan, at which point I figured that the exchange-rate risk would be negligible over the entire 30-year loan period. Now I'm more interested in paying it off early.)
Here are the numbers on ours:
Purchase price: EUR 237,000 (we made a ca. 20% downpayment)
Current resale value: probably around EUR 220,000 to 230,000, but the real estate market here is very stagnant at the moment.
Amount financed: CHF 275,300 (=EUR 178,801 at exchange rate of 1.5397 in late Nov. 2008)
Terms: 30 years, variable interest rate, which has dropped every year so far and is currently at 4.81%
Current principle owed: CHF 248,450 (=EUR 206,628 at exchange rate of 1.2024 in late Nov. 2014)
As you can see, in EUR terms we owe EUR 27,827 more now than we did six years ago! And of course for most of the repayment period those francs have been more expensive each monthly payment than they were when we borrowed them. (In fact, there has been only one single month in which the exchange rate worked in our favor.) On the other hand, our interest rate has consistently been about 2% lower than it would have been for a EUR loan during the same time period.
I'm planning to go to the bank and talk to them about early repayment, and I expect them to tell me I'm crazy for even considering it because francs are so expensive right now. But the way I've starting thinking is this:
If we made a lump-sum payment of CHF 10,000 (EUR 8,316) it would save CHF 20,405 (EUR 16,970) in interest. If we do a lump-sum payment of CHF 20,000 (EUR 16,633) it would save us CHF 38,465 (EUR 31,990) in interest, which is already more than the current "shortfall" we face due to exchange-rate risk. So it seems like a good idea despite the currently unfavorable exchange rate.
Other considerations: interest rates are likely to rise again someday, and it's very hard to predict what's going to happen with the CHF/EUR exchange rate. I'm inclined to think it will stay "pegged" like it is now for some time to come. I need to make sure I understand all the fees the bank will impose on us for early repayment (they'll run the numbers for us), but I still expect it to be a good deal overall.
Our overall financial condition: our income varies a lot but is currently around EUR 58,000/year after taxes. We have about EUR 20,000 in savings and about USD 21,000 in TIAA-Cref funds (still more exchange rate risk!) We're not nearly at the rate of savings/investment we should be, but I'm aiming to change that as of now. Hence my consideration of the mortgage and whether to throw everything we have at wiping it out or whether we should also try to increase our investments too (and make some of them dominated in EUR!).
Any thoughts or additional angles to ponder?
-Z