Is it wise to pay off some of my mortgage early in this case?

Question

I live in the Netherlands. I bought a house a couple of years ago, So far I paid around 30% back, from which 70% are extra payment, as my bank allows me to pay some amount extra yearly fee-free.

I can do extra payment now, but I'm hesitating. I'm putting all my money in the house. I'm thinking maybe it's wiser if I invest. The probably is that I'm a newbie to investment, and really have no experience.

I could think of two options:

• Stock market, but it's pretty bad at the moment. I read about it, and I understand that if I invest now, in 5 years, I might get double money. That sounds a good idea for those who have a lot of money.

• Buying a second home, but that is also a difficult option, because new Dutch law sets prices very high for second homes.

Any advice on this?

Update, my current interest rate is 1.5% fixed for 5 years, and in 2028 I have to pay whatever the interest value then for another 20 years.

Answer 1

You might double your money in 5 years of stock market investment. Or maybe lose half, or break even.

Paying your mortgage early, though, is a guaranteed return on investment.

Before deciding to pay extra on the loan, or would ask myself:

1. Do I have an adequate emergency fund?
2. What are fixed deposits paying in my country?
3. How old am I?
4. What is my risk tolerance?
5. What do I see in the economy’s future?
6. How/where in “the stock market” would I put the money?

Answer 2

You say your mortgage rate is 1.5% for the next five years. In the current climate that's incredibly low. There are some savings accounts that pay higher interest rates than that. You are likely to be able to find safe and secure investments that will pay better than that. If that's the case then you should not pay off your mortgage, but instead invest the money.

Investing in the stock market is risky. You might make a ton of money, but you might lose some as well. If you are OK with the idea of perhaps losing money then go ahead. But if you are not there are plenty of alternatives.

The safest are Fixed Income investments, where you give a bank your money and they pay you a fixed interest rate and then give you back the money at the end. The interest rates are usually higher than a savings accounts, but not by much.

The next best is what we in Canada call a Mutual Fund, and I believe is called a SICAV in the Netherlands. They come with various degrees of risk, and if you pick a conservative one you are very unlikely to lose money. Average rates of return are significantly better than Fixed Income.

However the best advice is to consult an investment professional about where you might put your money. They can advise on likely rates of return and degrees of risk. They can also advise about tax implications. These are important to your decision because you will pay tax on any investments you make, but paying off your mortgage is essentially "tax free" - you don't get taxed on mortgage payments you are not making.

The other thing to think about is what else you might need the money for. If you might have a big expense coming up (getting married, getting more education, buying a yacht) then keep some money where you can withdraw it at the right time. Also make sure you've got a little bit money easily accessible in case of an unexpected expense.

In my unprofessional opinion you are going to easily be able to find a safe, secure investment that returns better than 1.5%, and so you probably should not pay off your mortgage.

Answer 3

Not trying to give the best advice, but make you some money: Your mortgage is 1.5% per year. Look for a savings account with a reputable bank, you should be able to get much higher interest rate. Put the money you wanted to pay off into that savings account.

You make some money, not much, but it is safe. Take the longest terms. If you paid your mortgage off, there would be no way to access the money, do you can have an account fixed for two or five years. Whatever pays the highest interest.

Correction: I found a site showing savings rates in the Netherlands. Oh f***. In the uk, 4% from a high street bank is no problem (right now).

Answer 4

I am in a very similar situation. I didn't know anything about investing until recently and still don't know much about it, so take this with a grain of salt, but because the situation is so similar I thought I'd let you know what we did.

Like you we bought a house a couple of years back. Our mortgage has a 1.2% interest rate fixed for the next 8 years. We never have a fee for paying off early, no matter the amount. Because of an inheritance we were deciding between paying off early, saving, and investing.

• Given that the mortgage interest can be deducted before taxes (hypotheekrenteaftrek), the mortgage only costs us about 0.8%. At the moment there are saving accounts with a higher rate, so there is no point in paying off the mortgage right now.
  • If there is a chance you will move to another house it may be better not to pay off the mortgage as well. Interest rates will likely increase, and it is possible to take your mortgage to your next house with the same rate (oversluiten). So in this case you want your mortgage to be high, so that you need to borrow less for the increased rate.
  • If there is a limit to the amount you can pay off early without a fee, it may still be wise to do so, depending on what you expect the interest to be when it becomes variable.
• The >0.8% saving accounts are not green and sustainable products, and we wanted to limit ourselves to that. Then there are longer term deposit accounts (depositospaarrekening) which can get you around 2%, but you have to pay a fee if you want to withdraw early. A five year deposit might be an option, so that you can withdraw around the same time as the interest on the mortgage becomes variable.
• We then looked at investment options. The VEB has nice information for beginning investors. We again limited ourselves to green and sustainable products (artikel 8 and 9), so if you do not care about this you can get a better return on investment. This is what we eventually went with: a low-risk, low-yield defensive mix fund, together with MFIs (microkrediet). But we only chose this because:
  • We have a buffer and earn slightly more than we spend, so we don't end up in problems if we lose this money.
  • The defensive strategy of the fund means that even with a short horizon (8 years, or less if we move to a larger house before then) there is a reasonable chance that bad years can be compensated for. In general, the more risk you take, the longer a horizon you need. The funds we considered had a minimum advised horizon of 5 years, we did not see funds with a shorter advised horizon (the ASN Bank has funds with an advised horizon of 3 years on the website, but in the essential information document it then says 5 years).
  • We added MFIs to the portfolio because they are relatively stable against the backdrop of the war in Ukraine. Otherwise, the mix fund managers ensure spreading.
  • We spread our investment over time: investing part of our money every week for a total of 9 months. This is safer because you don't have the risk of starting on a peak. It also allows us to get a feeling whether we are comfortable with the whole investment thing without going all-in immediately.
• I cannot weigh in on the second home option because we did not have enough money for this to consider it. Though based on common sense I would want to buy a second home at a moment house prices are low, while the market is cooling off only very slowly. Letting that house can be a source of easy income though, but can also give a lot of extra work (laws are very much in favour of the renter in the Netherlands).

Stock market, but it's pretty bad at the moment. I read about it, and I understand that if I invest now, in 5 years, I might get double money.

In sustainable funds, this return on investment is only forecast for aggressive funds in good scenarios. Again, non-sustainable funds will be able to get higher yields, and I cannot speak to that. But for the sustainable funds, the average case would yield around 25% for aggressive funds, or 100-150% in "good" forecasts (a 2.5% chance that it will be even better). But again, high possible yields go hand in hand with higher risks, and therefore need a longer horizon (see above).