Special repayments or investing in the market? Alternatives?

2021-10-24 13:17:20

Hello everyone!

Our financial situation is currently somewhat in flux, and we are currently calculating what to do with leftover money at the end of the month once everything is settled.

Soon we will probably be in a situation where we have around 1500-2000€ left at the end of each month. Of that, we want to keep about half readily available (house reserves, vacations, modernization, and such luxuries), and invest the other half in capital accumulation. For simplicity, we are roughly calculating with 10,000€ per year.

I ran this through a few of my Excel sheets and, although one might have expected it, I was relatively surprised how "economically unprofitable" extra repayments are for a construction loan taken out in 2020. I calculated 3 scenarios:

The scenarios all of course have pros and cons. But putting everything into the construction loan seems very conservative to me. The amount of money I saved overall after the remaining 13 years could already be achieved on the market if the price increase was only about 1% annually. I believe the MSCI World has grown on average around 8% per year over the past 10(?) years.
However, putting 100% into ETFs is also risky because when the 15-year fixed interest period is over, we will need the accumulated money, but no one can predict what the price will look like at a specific time X. With ETFs one should think more long-term. Needing the money on a certain date is rather unfavorable.

Another idea was possibly to acquire a condominium and rent it out, and use the "throughput" minus reserves for extra repayments.

Which strategy would you follow / has anyone already thought along similar lines?

Best regards, Kati

2021-10-24 15:59:20

Currently facing the same problem.

My extra repayment with 28 years fixed interest/full repayment obviously has a significantly worse return than an average broadly diversified ETF over this period. Similar to you and like everyone else.
The argument of some people here is: "Debt takes precedence over an investment" or "You wouldn’t have taken out a loan to invest in an ETF anyway."
But that actually doesn’t make sense if you can pay off the debt faster overall by first investing the money in an ETF for a few years.

For me, a €20k extra repayment saves €10k in interest over the term. So more or less a 50% return.
Even with only 4% p.a. return in the ETF, after 28 years I achieved a 200% return, but this still has to be taxed.
At 8%, it’s 760% if I calculated correctly.
However, this only makes sense if you really invest the money long-term; with a short-term investment the risk increases that you (assuming extreme bad luck) still make a loss.

Added to that is inflation. So a payment of e.g. €1,500 corresponds in 20 years with 2% inflation/wage increase adjusted for inflation to a payment of about €1,000.
The financial burden from the loan installment therefore decreases virtually "by itself", while the money in the ETF keeps growing.

So far, I haven’t made any extra repayments and have put everything into a Vanguard FTSE All World. By the way, it is even more broadly diversified with almost 4,000 versus 1,700 securities in the MSCI World and also not so USA-heavy. But I don’t want to give you any investment advice now.

I will probably still put a few thousand euros into the extra repayment to satisfy my conscience.
For these reasons, I can of course not advise you anything better than what I have done.

2021-10-24 16:57:47

We will probably have around €1500-2000 left at the end of the month soon.

I don’t mean to offend you, but because of your frustration in the summer, I would quickly invest the whole surplus in a good garden fence on the left. As was written a few months ago, there wasn’t enough money for that… and the next summer will definitely come.
Furthermore, I can advise you to calculate less and listen more to your gut. I get along quite well with annual special repayments and otherwise just treat myself to something.

2021-10-24 17:15:59

I am currently facing the same problem.

My special repayment on a 28-year fixed interest/full amortization loan obviously has a significantly worse return than an average, broadly diversified ETF over this period. Similar to you and like everyone else.
The argument of some people here is: "Debt takes precedence over investment" or "You wouldn't have taken out a loan to invest it in an ETF."
But that doesn't really make sense if you can pay off the debt faster overall by first putting the money into an ETF for a few years.

My €20k special repayment saves me €10k in interest over the term. So more or less a 50% return.
Even with only 4% p.a. return in the ETF, I would have achieved 200% return after 28 years, though this still has to be taxed.
At 8% it's 760% if I calculated correctly.
However, this only makes sense if you really invest the money long-term; with a short-term investment the risk rises that you (assuming extreme bad luck) might still make a loss.

Then there is inflation. So a rate of, for example, €1,500 corresponds in 20 years with 2% inflation/wage increase to an inflation-adjusted rate of about €1,000.
The financial burden through the payable loan installment therefore decreases practically "by itself," while the money in the ETF keeps growing.

That’s why I have made no special repayments so far and have put everything in a Vanguard FTSE All World. By the way, it is significantly more broadly diversified with almost 4,000 versus 1,700 holdings in the MSCI World and also not so USA-heavy. But I’m not trying to give you investment advice now.

I will probably still put a few thousand euros into special repayment to satisfy my conscience.
For these reasons, of course, I cannot advise you better than what I have done.

Thank you, that already helps me that you see it similarly and had these thoughts too. I can’t ask my mother who is over 70 on the topic, for example; the whole family is ultra conservative, which you can partly understand, back then there was more bling and fewer stocks.
But aside from the capital markets, you hardly get anything anymore for savings currently.

Thanks for the “investment advice,” I’ll take a look at it. I also think the broader diversified the better. I don’t have to maximize profit now; I’m rather risk-averse.
I had considered really bringing a financial advisor on board for this, but that’s harder than I thought. Apparently, there are only very few truly independent financial advisors. And if I get comprehensive advice from someone, I want someone who doesn’t get commissions for transactions.

2021-10-24 17:44:09

We only took out the construction loan because of the low interest rates; we didn't actually need one. If you think that the money yields more elsewhere than in the special repayment, you can do that without any guilt. Money, as experience shows, makes more money than work, and income from capital investments is taxed less than income from work. If borrowed money earns more than it costs, you can stay happy. However, the much-desired "completely safe thing" does not exist. If I were you, I would build a "play money pool" that is not exclusively based on security and invest it. In doing so, do not jeopardize the ongoing financing and only use surpluses.

2021-10-24 18:00:56

Personal gut feeling (not investment advice) would be: It's all about the mix. But for us, that's still a thing of the distant future. (To even consider special repayments, we still need the house and the corresponding loan) Although we currently have/had similar thoughts during the savings phase (we are also currently putting a small part into ETFs, but quite a bit is just sitting there without interest – what happens with the ETFs when we actually want to build, we will need to evaluate again... the idea is to just leave it as is when the markets look bad, but we’ll have to see how well that works out)

In the repayment phase.... Personally, it would probably also depend somewhat on how the mortgage is structured.. If I know I only have a fixed interest rate for 10 years and after that there is still quite a lot of outstanding debt, I would probably tend to put more into special repayments. (To reduce the loan-to-value ratio and then have to refinance less). If the financing is fixed for a longer period, then I might be more willing to take risks. Practically, those with long fixed interest rates are probably also the less risk-averse people, who often tend to be rather averse to the stock markets. So presumably, that consideration wouldn’t apply to many :) (although I would argue that having the majority of one’s own assets tied up in real estate is also not exactly low risk)

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Special repayments or investing in the market? Alternatives?

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