Author Topic: Moved 2,000 towards the principal  (Read 6121 times)

cerberusss

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Moved 2,000 towards the principal
« on: July 30, 2013, 04:02:23 AM »
YES! Moved 2,000 towards the principal today. Really happy with this. I've got a 240K or so mortgage, and early this year I discovered MMM. After some calculations, I decided that part of this mortgage has got to go. I've been saving 500 euros every month, and in March I already moved a thousand towards the principal. Now, I've added another 2K and it feels AWESOME!

basd

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Re: Moved 2,000 towards the principal
« Reply #1 on: July 30, 2013, 04:57:03 AM »
Well done! It must feel good indeed.

As a fellow Dutchman: does it have any direct effect on your monthly mortgage payments?

I am very much looking at doing the same as you once I get my student loan out of the way (should be by the end of the year).

cerberusss

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Re: Moved 2,000 towards the principal
« Reply #2 on: July 30, 2013, 06:10:52 AM »
Not much. Saves me less than ten euros per month, due to the tax benefits I'm no longer reaping.

This is only half the answer, of course. As with any debt, you're not just benefiting this month but every month. And the savings snowball back into the principal.

hybrid

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Re: Moved 2,000 towards the principal
« Reply #3 on: July 30, 2013, 09:17:20 AM »
Most excellent!  Something I'm discovering is that with finance rates so low in the States (my mortgage is 3.25% fixed) that the tax benefit I get is goign away quickly.  We itemize each year, but my second of two children turns 18 in a few weeks and most of our tax breaks are going away.  We'll likely be using the standard deduction (or close enough to it) in the not too distant future.

So the argument not to pay off the mortgage too quickly and invest the money elsewhere is crumbling from the tax perspective (not that there aren't good reasons to do that).  I find myself in the MMM camp in that I want to retire my primary and rental mortgage on the hurry-up.  My investments are diversified, but they are far from guaranteed.  No mortgage debt would bring a lot of peace of mind for me. 

basd

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Re: Moved 2,000 towards the principal
« Reply #4 on: July 31, 2013, 01:19:38 AM »
This is only half the answer, of course. As with any debt, you're not just benefiting this month but every month. And the savings snowball back into the principal.
Point well taken! I can't wait to get going myself, although I will have to wait how much I can actually save, with our first child on the way.

cerberusss

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Re: Moved 2,000 towards the principal
« Reply #5 on: July 31, 2013, 03:30:05 AM »
This is only half the answer, of course. As with any debt, you're not just benefiting this month but every month. And the savings snowball back into the principal.
Point well taken! I can't wait to get going myself, although I will have to wait how much I can actually save, with our first child on the way.

That's an easy one, our baby girl was born barely two months ago :-)

In our case, the baby made me save money because you go out a bit less, and thus don't have as much opportunity for spending.

We didn't buy any new clothes, but other "big" expenses were:
- 100 for a stroller plus maxi cosi (serves also as a car seat) (2nd hand)
- 35 for a backpack carrier (2nd hand)
- 35 for a breastpump (2nd hand)
- 15 for a carrying sling (2nd hand)
- 110 for a cosleeper (new)
- 25 for a crib (2nd hand)
- 50 for a crib mattress (new)
- 25 for a play pen ("baby box" in Dutch) (2nd hand)
- 250 for ~18 washable diapers (2nd hand)
- plus another 100 for assorted stuff (changing cushion, box with stuff for home delivery)

Total, 750 or so. The play pen isn't necessary yet, and neither is the backpack carrier. The rest, like a baby tub, we got for free from friends and family. We don't use it, I just bathe the baby in the sink.

With the washable diapers and the breastfeeding, the baby actually does not cost anything yet. Mum eats somewhat more, but that's it.

basd

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Re: Moved 2,000 towards the principal
« Reply #6 on: July 31, 2013, 03:42:05 AM »
Cool :) And congratulations, of course.

Silvie

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Re: Moved 2,000 towards the principal
« Reply #7 on: August 01, 2013, 04:39:17 AM »
Hi, another Dutchie here!

I'm wondering how this all works with tax benefits. If you pay off part of your mortgage, the tax-deductible amount is less, meaning you're paying more income tax. On the other hand, the mortgage needs to be paid off anyway, but we usually do that when we sell the house. I don't know anyone who paid off their mortgage, just because of the tax benefits. What does this say about our government, trying to stimulate people to actually have a mortgage? :-(

Silvie

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Re: Moved 2,000 towards the principal
« Reply #8 on: August 01, 2013, 04:39:59 AM »
P.S. Congrats though! Must feel awesome! :)

cerberusss

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Re: Moved 2,000 towards the principal
« Reply #9 on: August 01, 2013, 11:10:16 AM »
Depends on your type of mortgage. I have a pretty big interest-only part. If I calculate with five percent interest, and I pay off a thousand, I save a gross 50 in interest per year. Minus the tax deduction, this is about 30 euros. Thus next year, I won't have to pay 50 euros of interest, but my income tax will raise with 20 euros.

People who say they don't pay off their mortgage, because it's not worth it, deserve to get the next question: "so where else do you invest your savings?"

There are other interesting investments though. Solar panels can be very interesting, and I might pause paying off the mortgage earlier, just to get these benefits.

Silvie

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Re: Moved 2,000 towards the principal
« Reply #10 on: August 01, 2013, 11:19:13 AM »
I have a large part interest-only too, and a part paying off principal + interest. Seems like you need to pay off quite a bit to save a few euros every month. Bu I guess it's worth it!

cerberusss

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Re: Moved 2,000 towards the principal
« Reply #11 on: August 01, 2013, 01:24:56 PM »
I have a large part interest-only too, and a part paying off principal + interest. Seems like you need to pay off quite a bit to save a few euros every month. Bu I guess it's worth it!

Don't forget the fact that it snowballs. I.e. if you pay off a thousand now, then you won't have to pay another 1500 in interest in the coming 30 years. So that's a major savings in and of itself.

And if you put the monthly savings, however meager, back into the principal, the savings will be larger and larger each month.

Silvie

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Re: Moved 2,000 towards the principal
« Reply #12 on: August 01, 2013, 02:18:49 PM »
Good point! I didn't think of that. Thanks :)

NV Teacher

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Re: Moved 2,000 towards the principal
« Reply #13 on: August 01, 2013, 08:38:58 PM »
It feels good doesn't it.  Over the past year I have paid down the principal of my mortgage by $22,000.  I'm getting it paid down so I can refinance to a lower interest rate.  A couple more months and I'll be there.  I can't wait!!!

cerberusss

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Re: Moved 2,000 towards the principal
« Reply #14 on: August 02, 2013, 12:09:27 AM »
It feels good doesn't it.  Over the past year I have paid down the principal of my mortgage by $22,000.  I'm getting it paid down so I can refinance to a lower interest rate.  A couple more months and I'll be there.  I can't wait!!!

I forgot about that; is it when you hit the 75% mark? I.e. when you only have to borrow 75% of the house its value, that you get better interest rates?

mr. T

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Re: Moved 2,000 towards the principal
« Reply #15 on: August 02, 2013, 06:46:06 AM »
Hi, another Dutchie here!

I'm wondering how this all works with tax benefits. If you pay off part of your mortgage, the tax-deductible amount is less, meaning you're paying more income tax. On the other hand, the mortgage needs to be paid off anyway, but we usually do that when we sell the house. I don't know anyone who paid off their mortgage, just because of the tax benefits. What does this say about our government, trying to stimulate people to actually have a mortgage? :-(

Assume the interest is 5% and your tax bracket is 42%. Also assume you have savings above the capital tax allowance (21k for singles, 42k for couples).

Repaying 1000 from the mortgage saves you 0.58 * 5% = 2,9% *1000 = 29 in nett interest.
It will "cost" you 0.42 * 5% = 2.1% *1000 = 21 in tax benefit.
Not repaying would cost you 1.2% capital tax * 1000 = 12
So from a tax perspective you lose 2.1 - 1.2 = 0.9%. If you repay your mortgage with taxable capital, you make 5% - 0.9% = 4.1%. That's a pretty good yield, given that it is risk free (or as risk free as any investment comes).

So, mathematically, and purely from a tax point of view, not repaying is more favourable. The tax deduction on the mortgage interest is 9 per year more valuable than the saving in capital tax. You donate 9 a year more to the government.

Of course repaying has its own benefits:
- it still gives a risk free, after tax, yield of 4.1%, which is way better than any savings account and any respectable government bond.
- money paid into the mortgage can't be spent anymore. It enforces discipline.
- it makes you less vulnerable to interest rises in the future.
- it makes you less vulnerable to political risk (government changing the rules to your disadvantage).
- it lowers your fixed cost base for the rest of your life.

Silvie

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Re: Moved 2,000 towards the principal
« Reply #16 on: August 02, 2013, 07:50:38 AM »
Thanks for your explanation Mr T! I currently don't have more than 21k in savings (yet) but thanks to this example, everything makes a lot more sense to me.

mr. T

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Re: Moved 2,000 towards the principal
« Reply #17 on: August 02, 2013, 08:31:35 AM »
In case you repay with non-taxable capital, you lose your tax deduction, but you don't gain a saving on capital tax. Your yield will be 0.58 * 5% = 2.9% (in my example). If you can find an investment that agrees with your risk profile and that yields more than 2.9%, it might be better not to repay and build capital instead.

Of course, whether repaying makes sense for you depends on your personal circumstances.

Silvie

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Re: Moved 2,000 towards the principal
« Reply #18 on: August 02, 2013, 08:43:41 AM »
I think the Dutch system is crazy for stimulating people to have mortgages... I will definitely look into it!

mr. T

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Re: Moved 2,000 towards the principal
« Reply #19 on: August 02, 2013, 11:43:03 AM »
It is. It's also strange that the tax deduction on mortgage interest is more attractive for high incomes than for low incomes. It's also strange that building capital is punished by capital tax. And that the government stresses that people should be responsible for their own life, but the tax free capital is only 21k. That amount won't help you through much of a disaster.

That new rule that rents will be income-dependent is crazy. Now two people living in identical flats in the same building will pay different rents. And will the rent drop if the renter's income decreases? How will they administrate all this?

Many aspects of Dutch tax law are insane.
<end political rant>