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Last week we went to the bank to talk about a mortgage. Here in Belgium, 40% of your mortgage is can be deducted from your taxes.

You can deduct 1520 euro during the entire course of the mortgage. Additionally, the first 10 years, you can deduct an extra 760 euro. You pay 40% less in taxes.

With numbers: if you pay 4000 per year, you can deduct 2280, which causes you to pay 912 less in taxes.

Now we got a very nice interest margin on our mortgage: for loaning 155k on 10 years, we pay 1.14%. That's 1366,90 per month.

After 10 years, we will have paid 164.028 euro (to loan 155.000 euro). But we get 2*912*10=18240 back in taxes, so we'll effectively have paid 145.788 euro.

Now we're thinking: would it be interesting to loan a bit more money, which'd enable us to invest our savings at a higher interest rate than 1.14%? Even with inflation, on a 10 year horizon, this should be doable?

  • So you have effectively a negative interest rate after tax rebate? Seems like free money even if you just borrow and put into a savings account. Are you sure you have your numbers right? – SMeznaric May 5 '16 at 11:57
  • Yes, free money, but you can only spend the money on your house. You can't loan the money and invest it. You can loan it, and invest your savings into something else instead of your house. – Konerak May 5 '16 at 20:54
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Clearly this is doable and many people are doing exactly this. At that kind of rate many will tell you to borrow as much as you can and invest. This strategy does not work if you spend that money on dumb stuff, but you don't seem the type to do such a thing. In some will argue that it is the only logical thing to do.

Some will say that this is not a good idea due to risk. Your chosen investment could lose value. If this happens you would have been better off paying down your mortgage.

While my own interest rate is not as good as yours, it still pretty darn low (1.97%) after my tax discount. Despite that I am aggressively paying down my mortgage. My wife and I want to be debt free. There is a certain freedom that comes along with that which cannot be explained by numbers.

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I don't follow the numbers in your example, but the fundamental question you're asking is, "If I can borrow money for a low cost, and if I think I can invest it and receive returns greater than that cost, should I do it?"

It doesn't matter where that money comes from, a mortgage that's bigger than it needs to be, a credit card teaser rate, or a margin line from your stock broker.

The answer is "maybe" - depending on the certainty you have about the returns you'd receive on your investments and your tolerance for risk. Only you can answer that question for yourself. If you make less than your mortgage rates on the investments, you'll wish you hadn't!

As an aside, I don't know anything about Belgian tax law, but in US tax law, your deductions can be limited to the actual value of the home. Your law may be similar and thus increase the effective mortgage interest rate.

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