A way too big loan?

As I mentioned in my previous post Great news, I took a rather big mortgage of €160,000 to pay off my apartment.

As a matter of fact, I could have paid cash for my apartment without a loan. So why didn’t I go down that route?

Return of stocks > cost of intrest on loan

My intrest rate is 1,89% fixed. Add up the accompanied costs of acquiring a loan and my total yearly intrest rate (costs included) should be around 2,20 – 2,30%.

However, it is not that hard to achieve yearly around 6-7% in the stock market. If you put in some more work, it can even go higher. So, given the high margin of safety, the choice was easily made. This way I can keep all my money in the stock market and keep collecting dividends.

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The money I receive from my parents, will mostly go into the apartment for furniture, machines, painting… I expect to still have some cash left after that. Problem is that I had to promise not to buy stocks with the money from my family (they are quite opposed to the stock market, unfortunately). That cash can be put in a savings account to pay for apartment expenses while I can keep transferring my wage minus the mortgage in the stock market.

Another option would be to buy a second property and I will probably walk down this aisle if the current tax laws stay applicable. I would look for a studio/apartment up to €140,000 and rent it out.  This would be a combined effort of paying an amount cash and getting another loan. The rent should cover the loan. This way I can optimize my tax form. I would like to achieve this by age 25.

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13 reacties op ‘A way too big loan?

  1. Mattias

    with the tax benefit of your dwelling, your net cost should even be lower. so definitely a good choice to take out a loan for the property. You also have ammo left for other things. I wouldn’t bank on an easy 6-7% in the stock market though although you may have achieved that in the last years. We are definitely in the last stages of the bull, and valuations are high (though they can still climb), but in a full cycle perspective, I am rather taking money off the table. Regards, M

    Geliked door 1 persoon

    • When Do You Retire?

      Thanks for the feedback. It could be true that 6-7% will be hard in the future years, it will depend mainly on the expiration date of the bull market. Currently I still plan to buy my outstanding call options (around €10k) and then stack up some cash again for future opportunities.

      Geliked door 1 persoon

  2. financialfreedomsloth

    At 2% interest it is definitely not too much of a loan.Can’t you use the money left over to pay the mortgage each month? I mean, it is going to the appartment as you parents wants and that way you can plow more of your pay check into the stock market.
    Another thing is: you could consider this money as an emergency fund and eliminate your own cash reserves …

    For furniture and stuff: it might be worth it to keep rentability in mind. With the very real posibility you have of working abroad for months, having an appartment that you can rent out for those months can be a big plus …

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    • When Do You Retire?

      That was indeed part of the plan 😉
      As for now I don’t have a real emergency fund, it would certainly be a good idea to create a decent one for unforeseen costs at the property.

      I will indeed keep the rentability in mind as I will try to foresee about 4-6 sleeping spots and not too expensive furniture to start.

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    • mr2ndopinion

      I live in a rental. 😦

      One thing I can assure you on your quest for renting out on others. Don’t go with the cheap stuff although you here rumors renters can break stuff. Go for the not cheapest but most sturdy stuff. You’ll pay a little more but if something is near to unbreakable, if it breaks, it’s on them. And not wear and tear of something that was cheap. A plastic toilet roll holder breaks easier than stainless steel. Which can also be bought cheap if you know the channels were to get such. 🙂

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  3. mr2ndopinion

    Great for you mate. Seems you got your golden eggs in the basket. Happy to see it go great! I’m just starting to think about the stock market. I’ve been averse from it since I’ve been raised in an environment that rather puts down people and scares them for their profits. Anyway, more mature and independent now I’m starting my survival plan in this crazy economy. Wish I could read more info on how you exactly handled your first days and how you found the right brokers in Belgium and stuff. But there are some other blogs out there and bogleheads seems to have some information for Belgium too so i’ll be looking into that. My knowledge has already grown quite a bit and I’m expecting myself to buy ETF. My only concern is that the stock market will crash again and I don’t have that much, to begin with. It’s scary to walk on thin ice.

    Anyway! Congratz with your newly owned (yet to come) living space!

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    • When Do You Retire?

      Hey, I might write a post soon about ‘how to start investing in Belgium’ for our age-mates.

      I understand it can be scary to take the leap and investing your hard earned cash. The point is, you don’t need that much to start. Even with a capital of only €5,000 you can already make a big difference. You could for instance buy an initial position of €1,000 and then spread your extra buys over the coming months. Don’t put all your money immediate in the stock market. Spread over time.

      The most important thing is to start.

      Geliked door 1 persoon

      • mr2ndopinion

        Exactly… I’m going to start.

        I had some savings in medirect but it takes 3 months to withdraw. So somewhere in December I’d have more funds. At this moment I can start off with 4K.

        I was thinking of starting with ETF’s asap. any guidelines on how I can start looking for a broker that’s the best option? Also, how do I declare the income if there is any out of it and which ETF’s are worth looking at. I got a feeling, Vanguard is a good long-term option from what I’ve seen on the charts at this moment. I didn’t really do research yet wouldn’t know where to start but as far as I can see Vanguard ETF’s always been pretty stable in growth and they recovered quite quickly from 2008 unlike other ETF’s? Correct me if I’m wrong.

        I’d just like to take the opportunity now because I’ve read that best moment in the stock market is between September and February and that the other period is less worthwhile. Still but less. Which makes sense because of the colder periods, more being bought and consumed. But yeah, I’ve read about it yet I don’t know these assumptions are validated by facts.

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  4. Claudia

    Well, greetings for the acquisition! I have a similar loan ( value and rate) but just for 15 years and almost 2 already past.
    Add another small ‘revenue’ = 1500 euro /year return. Every year…. That’s why I decided there is no advantage to pay down extra, periodically.

    The aprt. is close to your job? in case yes, you could use the bike/walk and save money and time in transport and convert this time daily in sport. Maybe it is not visible now, but after years of ‘glued_on_chair-job’ any walk is helpful.

    Geliked door 2 people

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