Does free money exist after all?

The price of houses in the Netherlands is exploding. Annuity mortgages are the new norm. Both facts contribute to the increasing gap between the market price and the remaining mortgage. Unfortunately this only makes me (and others) rich on paper. After all your money is stuck in bricks and mortar. It does not have to be that way. With the interest rate still at historical low levels, an alternative can be to take part of the money out of the house and invest it elsewhere to generate cash flow or accumulate wealth. Or both.

The basics of taking the money out

Let's assume someone bought a house for €300,000 in 2013 right at the bottom of the market. They paid off by an annuity scheme, lived frugally and did some extra down payments, leaving them with a current mortgage of €200,000. The market went up and the house is currently valued at €400,000. Selling the house would give these imaginary people €200,000 in hand to play with. But what if they don't want to sell but still want to play? 

I checked the situation at Rabobank. These people are wise and don't want to max out their mortgage. The Rabobank has the lowest interest rates on offer for mortgages with an loan-to-value (LTV) under 67.5%, meaning a mortgage of up to €270,000 for the example house. Hence an extra mortgage of €70,000 can be taken. An interest-only mortgages ("aflossingsvrij") comes with an interest rate as low as 1.5% (1-year fixed rate) or €87 a month. That is not much at all to get €70,000 in hand to play with! 

Be aware there is no mortgage interest tax deduction ("hypotheekrente aftrek") on this extra mortgage as it won't be used for improvement on the house. This tax benefit will go down to a maximum of 37% by 2023, so we are talking about €32/month you can't deduct. The Dutch government typically stimulates debt but even they have their limits.

On the other hand there is no wealth taxation on the €70,000 as there is a mortgage debt of the same size in tax box 3. This saves 0.58% or €34/month, assuming you already filled up your free wealth tax bracket (first €30,316 of savings for 2019). 

Where not to invest

This is one of those rare cases where I would not feel comfortable investing in a low-cost index fund. I am sure you can find a fund that yielded 8% over the last few decades but the problem is that this is an average and the deviations are huge. Imagine the market goes down 30% in the first year. At that point you borrowed €21,000 more than you still possess in stocks! This is not even considering your monthly interest payment of  €87. 

The one rule not to break when investing in index funds is to sell in a crash. I am not sure if I would keep my calm in the not completely unlikely situation described above. I prefer to not test my nerves and stay out of this construction all-together. Still very happy to dump anything into index funds that is left at the end of each month.

You can be the bank!

Websites like sameningeld.nl and mogelijk.nl connect people looking for money to purchase real estate for the rental market and people who have that money. Interest rates are around 6%. No defaults have occurred. In our example the €70,000 would generate interest-based income of €350/month, so a net cash flow of €263/month after taking off our interest payment to Rabobank. This is excluding annuity payments that apply at mogelijk.nl and sameningeld.nl which further enhance the cash flow (but does not impact on wealth accumulation). 

Essentially we are the bank now. We get money in at a low interest rate and we lend it out at a high rate. We are also the bank in the sense that there is a notary document between the parties. If things turn for the worse and our monthly payments stop we claim the real estate and sell it at an auction, just like the bank! We also don't care if property prices drop. Not our problem, we don't own the real estate.

At sameningeld.nl projects typically run for 5 years. If you would fix your interest rate at Rabobank for 5 years (2% at the moment) and lend it onwards at 6%, you generate a 4% cashflow. This fully excludes any risk of your interest payments going up while your interest income stays the same. So the cash flow is guaranteed for the full 5-year period. Can someone explain me where the flaw is in this reasoning? Otherwise the imaginary people might go to the local Rabobank soon to execute this plan 😉

I want it all and I want it now

FI gives you freedom to fill your days with whatever you desire. But becoming FI takes time and that does not go well with my lack of patience. People around me buy nice stuff. I have ETFs and an empty fridge. Where is my freaking reward after doing everything by the FI rule book for 5 years!?

The scene

I lived abroad and traveled the world. It was awesome. After being well in my 30s I settled down. I finally started doing everything by the book. Not my book but most peoples book. We got jobs, bought a house and are proud parents. We paid off a substantial chunk of the mortgage. We make good money, spend mindfully and invest what is left. Above all; everyone is healthy.

The mind

Geldnerd recently made an awesome tool which confirmed my own back-of-the-envelop calculations. Ten more years and I can walk out of my office and never look back. At the tender age of 52. Not bad at all. We both work four days. Every Friday is already a partime, pre-pension day for me. My job offers a great DC pension with low costs. The math is clear; I should just sit it out for ten more years.

The heart

I don't like my job. Not this one in particular. I have nice colleagues and the projects are interesting. I probably will not like any job where I sit behind a computer in a company where the only goal is more profit. Ruled by computer systems that say no when common sense says yes. I would love to walk out now and start my own business. Maybe in the same field, maybe not. But my mind is stopping me from doing that, see above.

How is this fair? Once people find the FI concept you cannot expect them to hang around in their jobs for a few more decades! We have better things to do. We could make a real difference to the world instead of working!

Everyone is raving about compounding but it has one big disadvantage. It takes forever. Five years into the FI journey and all I have to show for it is a number of ETFs on my computer screen. And the computer says no again when asked whether it is enough to quit. 

I want it all and I want it now.

Parental leave or part-time prepension?

I have been on parental leave since our oldest was born. With the youngest starting school halfway next year many colleagues assumed I would show up full-time again soon. With the news leaking out I will not, I got some interesting questions (interrogations!?) showcasing how stuck most people are in their old-world ways.

Parental leave in the Netherlands

Many people over here use their right to parental leave. Unless you are a government worker the leave is unpaid and both parents can take up to 26 weeks. The original idea being that if both parents would work 0.5 fte you can be at home for the first, intense year. Most people including us seem to use it differently. Both parents work 4 days and they typically do so until the youngest one goes to school at the age of 4. 

By that time you run out of days and you automatically fall back to your contractual work week. Unless you indicate you prefer to decrease the size of your contract and only show up 4 days a week for the rest of your life. Makes sense to me.

You lazy bastard!

Not all my older, white, male-dominated colleagues are agreeing. Some call me lazy. I disagree. They seem to forget their wives don't work. This brings their family workload to 5 working days a week. We do 8 working days equally shared between the 2 of us. We also equally share the family workload. Sounds fair and not lazy at all to me. Feels busy enough anyway.

You will have a lower pension!

This I cannot deny. If you work 80% your pension will be 80%, plain and simple. However, this is old-world thinking. You spend all your money every month and your life style requires a similar amount of income after retirement. Not us. We have a savings rate of 35%. While both working 4 days. No need for more pension. I have no interest in pumping more money into a broken system.

What are you gonna do all day long?

No offense but these kids drain your energy and time. Although I have no concrete plan what I'll do when I finally have some own time again, I am sure I will enjoy it! I might do more sports. I might use my bad knee as an excuse not to. I might cook more from scratch. I might decide after the first attempt that making your own pasta is too much work and never do it again. I might write more posts. I might binge watch Netflix. I might find a new hobby. I might sit on the couch staring in the distance enjoying the silence.

I have no concrete plan but I am convinced I will enjoy my part-time, prepension every Friday!