The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: KasMA1990 on June 03, 2018, 06:33:12 AM
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I live in Denmark, and we have a situation where our national bank has had negative interests for a few years now. I'm not deep into why that is, but basically we want our currency (DKK) to be locked to the euro in terms of value, and adjusting the interest is how we make that happen AFAIK. The second thing about living in Denmark, is that it's common to loan money for a house in what losely translates to a real estate credit institute; these institutes find a private investor who wants to loan you their money, and that loan is your mortgage*, kind of like buying bonds. This results in lower interests for house buyers, at the expense of some flexibility, since you most lock yourself into how long you want to pay the loan back over (10, 20, 30 years, with no option for paying extra, to give your investor some stability), and it also makes it more costly to switch loans.
Anyway, here's what my personal situation is**: my girlfriend and I are buying a house (in which we plan to stay for the next 4-7 years), and we have a few different options to choose from for our mortgage. We could go with a completely locked interest over say 20 years (which would lock us to 1,5% interest), or a completely unlocked interest (currently sitting at -0,27%, but shifting with the market every half year), or a form of middle ground. The middle ground could either be a loan where we get the interest locked for X years out of the total life time of the loan, and once those years have passed, the interest is reset to whatever rate the market has settled on at the moment, locked for X years again, and so forth until the loan is paid off. The other middle ground could be having an unlocked interest rate, but with a cap for how much it can grow over the next X years, with the cap being reset the same way the interest gets reset in the other type of loan.
So here are my questions: which mortgage should we choose? And should we maybe be looking at an interest-only mortgage to have more cash for investing?
I know MMM has recommended paying off the loan, and I would much prefer to do the same, simply because I don't like owing money, but the solution we're most comfortable with so far is to lock the interest for every 5 years over 20 years total. This way our interest would be around 0,5% the next five years. This is excellent for actually paying off the loan instead of just paying interest, but the money we could earn from investing all the cash instead and just paying this ridicolous interest isn't anything to sneeze at either.
So what you would you all do if you were in this situation?
Regards, Kasper
* Real estate credit institutes can only cover 80% of the price of a house, the rest usually comes from a bank if you can't cover the 20% yourself.
** Bonus info: We only have enough for a 6% down payment, so we're borrowing the rest in the bank for 4,5% interest, but we plan to have that paid back in the next year or so.
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I don't think MMM recommends paying off mortgages in all situations, and certainly not when the interest is negative.
I think generally the cheapest option, at the end of loan period, having a flexible interest rate is the cheapest option. However, this means that right now you'd get an extremely good deal, but in, say, 10 years time, your interest rate could be 10%. A fixed interest rate would give you more stability. On the other hand, when interest goes up, inflation is usually also on the rise, but the principal of the mortgage remains the same. Say your mortgage would be €500 on a €2000 income now, ten years from now when the interst rate is 10% the monthly payment might be €600 but your income could be €4000 by then.
In your case, there is apparantly such a thing as free money (which a negative interest rate basically is) and I would absolutely take that chance, even if that means risking a higher interest percentage in five or ten years from now.
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Yeah, I was referring to the advice on paying off mortgages in general; I realize this situation is a bit special.
I hadn't considered the connection between the interest and inflation. Our government has just formally declared us to be in a time of economic boom, with many salaries expected to rise soon (and the interest with them), so maybe it's actually better to lock in the interest now. I should say that we only plan to live in this house for the next 4-7 years as well, so that's the time we're most concerned with. Plans can change of course.