Author Topic: Unsure what to do with cash for mortgage payments  (Read 2135 times)

Chairman

  • 5 O'Clock Shadow
  • *
  • Posts: 59
Unsure what to do with cash for mortgage payments
« on: April 09, 2017, 12:49:07 AM »
tl;dr: We have a very cheap mortgage, but it's conditional on having a very high balance invested with the bank, and the only investments they offer are high-fee actively managed funds. Unsure what to do.

We recently bought a house, first time we've had a mortgage, and due to my shitty negotiating skills we managed to get ourselves cornered into agreeing to some onerous conditions on the mortgage. The details:
  • 10-year fixed rate, absurdly low (< 2%), amount is about 200k, could pay it in as little as about 6 years without triggering any prepayment penalty clauses, so looking at total cost of the loan being anywhere between about 215k (if we pay it in 6 years) and 225k (if we pay it off in 10 years).
  • Need a minimum invested balance with the bank of close to 100k to qualify for this cheap loan.
  • Investment options mostly suck, actively managed funds, with expense ratios of about 1%.
  • This is a brick and mortar bank: savings accounts pay basically 0% and CDs are non-existent.
So we got deep into negotiations with the bank. They dangled the low-interest rate mortgage in front of my face like a carrot. I could see them salivating over locking me in to some high-expense rate investments. These people are piranhas, and I could see all the while this was happening that I was going to be their frickin' lunch. I tried to negotiate my way out of the high balance requirements by accepting a less favorable rate on the mortgage (say, 0.3% or so higher), but I'm just not good at this kind of thing. They applied a bunch of hard-sell pressure, we had a tight timeline, and the mortgage was about to fall through, or at least they made it seem that way. All this seemed absurd to me: if I was going to give them almost 100k in order to qualify for a better mortgage, why wouldn't I just keep the 100k myself and just ask for a 100k-smaller loan with worse conditions? In the end, the amount of interest on the loan (15k to 25k over 6 to 10 years) seems so low, that it doesn't seem worth going to such great lengths in order to micro-optimize. So, I told myself that whatever, I would let them hold onto my emergency fund and who cared if I didn't earn much money on it; safety is what matters most there.

So I'm now in this situation: they have a bunch of my money sitting in a savings account waiting for me to decide what to do with it. An almost 100k emergency fund is too much for me (that's about 4 years of expenses, and I probably only want 1 year). My choices are:
  • Leave the money where it is earning basically 0% interest, and know that 6 years from now when the mortgage is paid off all this will be behind me and I can move on.
  • Invest 75% of the money in their expensive, shitty funds (where fees are 1% but I might earn 4% or so) and keep the other 25% in the savings account as my emergency fund. In this case, too, I can get the f**k out of dodge in 6 years and move my money into Vanguard, where I really want it anyway (hopefully won't get killed with capital gains taxes... this is money I'd prefer to not touch for a long time if I can help it).
I'm currently leaning towards the second option. What do you think I should do?

MDM

  • Walrus Stache
  • *******
  • Posts: 9554
Re: Unsure what to do with cash for mortgage payments
« Reply #1 on: April 09, 2017, 01:00:30 AM »
If your investments go up, the second option is better than the first.

If the market return is negative over the next 6 years, the first option is better than the second.

What happens if you withdraw enough money that you fall below the "minimum invested balance with the bank of close to 100k"?

Chairman

  • 5 O'Clock Shadow
  • *
  • Posts: 59
Re: Unsure what to do with cash for mortgage payments
« Reply #2 on: April 09, 2017, 01:18:05 AM »
What happens if you withdraw enough money that you fall below the "minimum invested balance with the bank of close to 100k"?
Not clear. I've read the dozens of pages of paperwork, and the balance is not explicitly mentioned anywhere. It was more of a verbal thing.

As for the market going up or down, if only we knew, eh?...

I guess that 100k invested in a low-cost index fund over 6 years, earning, say 4% per year (modest bull market), would grow to about 127k. Not exactly life-changing (brings early retirement one year closer at mustachian spending levels). On the other hand, if the market were to tank 20% or more, you're looking at pushing back retirement by a year. Not a huge difference either way (+/- one year). I guess the other scenario is letting it sit in cash at 0% a year and then inflation surging and eating away the real value (but not the ability to pay off the mortgage, because that's fixed).

former player

  • Magnum Stache
  • ******
  • Posts: 4506
  • Location: Avalon
Re: Unsure what to do with cash for mortgage payments
« Reply #3 on: April 09, 2017, 05:19:51 AM »
How much are the pre-payment penalties?

frugaliknowit

  • Handlebar Stache
  • *****
  • Posts: 1670
Re: Unsure what to do with cash for mortgage payments
« Reply #4 on: April 09, 2017, 05:37:25 AM »
How much are the pre-payment penalties?

+1

and, how much did you actually pay in fees (either outright or added to the balance) to close this "smoke and mirrors" scam?  I would see what it would take to refinance in to a "real" mortgage.

I can relate to this.  I was in a situation where I was looking for a "no cost" refinance for a small balance.  The honest lenders told me they couldn't do any better than 4% (my then current rate).  A couple of lenders played this "carrot and stick" game with me where they said if I left some assets with them, they would give me a better rate.  When I asked what kind of rates, they just "clam up".  No thanks, not interested in "smoke and mirrors"...I prefer to do all banking/investing "a la carte", not "getting into bed" with any bank...
« Last Edit: April 09, 2017, 05:39:42 AM by frugaliknowit »

jade

  • Stubble
  • **
  • Posts: 200
Re: Unsure what to do with cash for mortgage payments
« Reply #5 on: April 09, 2017, 05:46:19 AM »
Sorry to hear that. Here in the UK there's usually cooling off period of 14 days to help in these kind of scenarios... I'm guessing you have probably looked into it or are already outside that period but just in case?
« Last Edit: April 09, 2017, 05:49:09 AM by jade »

Chairman

  • 5 O'Clock Shadow
  • *
  • Posts: 59
Re: Unsure what to do with cash for mortgage payments
« Reply #6 on: April 09, 2017, 08:28:27 AM »
How much are the pre-payment penalties?
Not totally clear (of course). The fine print says 0.5% which would be fine, but 3.0% "if the pre payment generates a capital loss" for the bank. I don't know how that is determined exactly, but we can probably count on it being the case.

While greater then the sticker rate on the mortgage, at 3.0% it would still be a cheap mortgage so is probably worth prepaying, I guess.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3131
  • Age: 37
  • Location: Texas
Re: Unsure what to do with cash for mortgage payments
« Reply #7 on: April 09, 2017, 08:31:41 AM »
Are you in the United States and is this mortgage a primary residence?

Bank, Savings and Loan, or Credit Union?


MidWestLove

  • Bristles
  • ***
  • Posts: 317
Re: Unsure what to do with cash for mortgage payments
« Reply #8 on: April 09, 2017, 08:38:13 AM »
A lot depends on where you are writing from . Also, your emergency fund does not have to be dead money (which is guaranteed to lose value over time due to inflation). Beyond things you need right away (couple of months of spending?), the rest could easily be in tax advantaged muni bond funds which are easily beating anything banks offer

Also, consider whether you want to lump things together like this or do things 'right' - keep your lending to lending and investing to investing and don't mix up the two (which is what I would have done).

Chairman

  • 5 O'Clock Shadow
  • *
  • Posts: 59
Re: Unsure what to do with cash for mortgage payments
« Reply #9 on: April 09, 2017, 08:40:33 AM »
Are you in the United States and is this mortgage a primary residence?

Bank, Savings and Loan, or Credit Union?
US, primary, bank (a small one, but a still a bank).

Lews Therin

  • Magnum Stache
  • ******
  • Posts: 2883
  • Age: 29
  • Location: Ottawa
  • Used to be Canadian Ben
Re: Unsure what to do with cash for mortgage payments
« Reply #10 on: April 09, 2017, 09:00:16 AM »
I have another way of seeing this for you, you now have a 3% margin investment account.

even with the 1% MER, you're looking at only 2% for "borrowing money" from the bank.

While it's a bummer that you have a 1% MER, this is still very cheap money that you should use to invest with them.

I'd hit the minimum with your bank to keep the 2% mortgage, and only pay the minimum in order to be able to continue using the money that you aren't paying in mortgage (difference between higher% and the one you have) to invest elsewhere cheaply.

As long as you concentrate on increasing your investments outside the bank (and slowly removing the amounts in the investment accounts as your mortgage equity gets closer to 100k) there should be very minimal effect on you.

larmando

  • Stubble
  • **
  • Posts: 195
  • Location: Germany
Re: Unsure what to do with cash for mortgage payments
« Reply #11 on: April 09, 2017, 10:39:59 PM »
I have another way of seeing this for you, you now have a 3% margin investment account.

even with the 1% MER, you're looking at only 2% for "borrowing money" from the bank.

While it's a bummer that you have a 1% MER, this is still very cheap money that you should use to invest with them.

I'd hit the minimum with your bank to keep the 2% mortgage, and only pay the minimum in order to be able to continue using the money that you aren't paying in mortgage (difference between higher% and the one you have) to invest elsewhere cheaply.

As long as you concentrate on increasing your investments outside the bank (and slowly removing the amounts in the investment accounts as your mortgage equity gets closer to 100k) there should be very minimal effect on you.
Indeed this is even slightly better. You get a 2% interest on 200k, and pay 1% on 100k invested, thus that's a 2.5% rate. Not terrible. Now it's not clear if you want to leave your emergency fund with them: if you need some of it in an emergency you may fall below the balance, if that's a problem.

Else if there's no penalty you can start "eroding" the balance by a few "emergencies" a month and see what happens, thus further reducing your rate.

Sent from my Pixel using Tapatalk