The balance between investing and paying the mortgage (Swedish conditions)

[Familjen Fri]

We (2 adults , 28yo + 2 kids) live in Sweden so our rules differ a bit from US conditions. Mortgages does not have to be payed down below 75% equity (owning 25% of the investment), i.e. most houses are never payed in full. We can not return the key to the bank if we can't afford payments, we need to sell or it's personal bankruptcy next.  Right now we have payed down the mortgage to 20% of the original value or about 25% if you consider rising house prices and inflation. PMI is no longer an issue. A housing bubble is a real possibility considering prices have risen 5-10% a year the last decade with an inflation around 1-2%.

The loan itself is $315K (low considering we live near the capital) and is not locked in. Current rate is around 1.7% after tax breaks. It can burst to 15% or it might go even lower. Over a longer period of time 3-5% (before tax brakes) is probably realistic. We are probably going to move in a couple of years to a cheaper home.

We like the Bogleheads philosophy and the idea of a lazy portfolio. We are considering to use the mortgage as our "bonds".

One idea is to allocate the monthly savings using age-10 in bonds. 20% to the mortgage and 80% to investing. If we had $100 to save this would be 20% to the mortgage and 80% to stocks.

Another idea is to look at the whole portfolio. Right now the house is at 100K equity. We could invest like maniacs the following years to reach 500K in stocks leaving mortgage at 20% and stocks at 80%.

How would you go about paying the mortgage and investing under these conditions? The goal of the game is early retirement.

[foobar]

Can you rebalance from the mortgage to stocks (i.e. take money out of the house)? If not then the house is not serving one of the  purposes of bonds in a portfolio.

Mortgage rates tend to be pretty slow moving (1-2% per year) so I wouldn't be worried about them shooting up to 15% in the near future but how would your cash flow look like if they went to lets say 7%?  And how much free cash are you talking about? If it was like 5k/month, I would say invest away. If interest rates start to rise (say above 4%), switch over to paying off the mortgage and you could quickly drop that principle down.

We (2 adults , 28yo + 2 kids) live in Sweden so our rules differ a bit from US conditions. Mortgages does not have to be payed down below 75% equity (owning 25% of the investment), i.e. most houses are never payed in full. We can not return the key to the bank if we can't afford payments, we need to sell or it's personal bankruptcy next.  Right now we have payed down the mortgage to 20% of the original value or about 25% if you consider rising house prices and inflation. PMI is no longer an issue. A housing bubble is a real possibility considering prices have risen 5-10% a year the last decade with an inflation around 1-2%.

The loan itself is $315K (low considering we live near the capital) and is not locked in. Current rate is around 1.7% after tax breaks. It can burst to 15% or it might go even lower. Over a longer period of time 3-5% (before tax brakes) is probably realistic. We are probably going to move in a couple of years to a cheaper home.

We like the Bogleheads philosophy and the idea of a lazy portfolio. We are considering to use the mortgage as our "bonds".

One idea is to allocate the monthly savings using age-10 in bonds. 20% to the mortgage and 80% to investing. If we had $100 to save this would be 20% to the mortgage and 80% to stocks.

Another idea is to look at the whole portfolio. Right now the house is at 100K equity. We could invest like maniacs the following years to reach 500K in stocks leaving mortgage at 20% and stocks at 80%.

How would you go about paying the mortgage and investing under these conditions? The goal of the game is early retirement.

[Familjen Fri]

There will be around $3 000 every month to divide between mortgage and investment.

My idea of rebalancing would just to restrict cashflow to one vehicle and fill up the other. So rebalancing would be a long process after a while. 7% interest wouldn't be much of a problem but savings would shrink. I guess we would have around $1000-1500 left to split between the mortgage and investing.

 Another thought was just to set up a plan for the house to be payed of in 20 years time (when the children will move out) and invest the rest. For an income perspective this would mean mortgage 40%ish and investing 60%ish.

[warfreak2]

Rebalancing by transferring funds between stocks and bonds is pretty important. If the stock market takes a 20% dive, maintaining your stocks/bonds ratio could entail immediately selling a large quantity of bonds and replacing them with stocks. That's means you'll be buying most of your stocks when they're relatively cheaper. The 4% safe withdrawal rate was determined based on the assumption that you do rebalance in this way.

[Familjen Fri]

Thanks! The easiest way seems to be set a fixed amount towards the mortgage and invest the rest in stock/bonds. This will probably let us sleep a little better at night too.