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?