Financial update 2018

Another year has passed and the stock market stopped gradually moving up in Q4 of 2018. At the moment the market is volatile and intraday swings of up to 5% are not uncommon. Swings are more down then up and as a consequence stocks have lost around 20% of their value. Let's see how this impacts our journey to FI.

Savings rate

Our monthly savings rate has been 35% throughout the year. We simply pay ourselves first. On top there is the once-a-year lump sum consisting of holiday money (2x), an end-of-the-year bonus and tax returns. We aimed to simply save 35% of all this as well to keep our yearly savings rate at (surprise!) 35%. However, we miserably failed this year and spend it all. 

We paid a substantial fine to lower our mortgage interest rate for the coming 10 years to 1.8%. This will save us money in the long run (see here) but is hurting our savings rate for 2018. We love our holidays and they are worth every penny. Our holidays are getting even more expensive as we are mostly forced to travel in the peak season due to our school-aged daughter. To top it all of we prepaid a holiday that is coming up in January and with that the full lump sum has gone with the wind, leaving us with an annual savings rate of 30%. 

The mortgage...

is boring. In Q4 we simply paid our monthly instalments, resulting in a slightly lower remaining debt. We have paid off 31% of our mortgage by now. With the new interest rate our monthly payment will now go down, while a larger percentage of the payment goes to paying off the house (rather than interest). Pretty neat, eh?

FI percentage

Our FI percentage is stuck at 16% for Q4. In fact our net worth is down a tiny bit in Q4, despite throwing more money into ETFs at least once a month. It's all part of the game. You can't be on FIRE if you can't stand the heat. We'll stay calm and stick to the plan. Markets will always recover in the long run. Plus we are buying cheap at the moment, we love discounts!

It's all relative

Our house still represents over half of our net worth (inset of the Figure). This will get even more dramatic when the new higher valuation comes in soon ("WOZ waarde"). We did manage to increase our ETF percentage a bit by throwing in some extra money to buy discounted stocks. 

We are happy campers and hope to keep up the good work in 2019! Many things will change this year, more on that later. For now we'll continue saving 35% of our income every month.

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 😉

Mind the gap; a remortgage hack

In the current low-interest environment many people are considering to pay an interest penalty fee ("boeterente") to remortgage. We recently did the same and I was surprised by the simplicity of the calculation by the bank. Many people in the FI community aim to pay off their mortgage early and in that case there is a substantial amount of additional money coming your way that the bank seems to ignore in their calculations. 

An example; what the bank does

Let's assume someone has a 30-year annuity mortgage. The interest is fixed for ten years. After five years the remaining mortgage is €200,000. The interest rates offered by the bank are substantially lower nowadays. This person goes to the bank to calculate the interest penalty fee to be paid. You can calculate your penalty fee here. Let's assume the penalty fee is €5000. If your new, lower interest rate decreases your monthly interest payment by €200, the bank will argue you earn the penalty fee back within 25 months. 

If you fix the interest rate for longer than 25 months you should go for it! If you would fix it for 15 years (up to 2033) you'll have 155 months to benefit from the lower interest rate after the break even point. It should be said (but never is) that there is also a scenario of even lower interest in the future. In that case you have paid a fine for nothing and are again stuck with a what-turns-out to be relatively high interest rate.

That being sad, people should really check out this option as it can save you a lot of money which you can invest. In our personal case our monthly interest payments went down to €325/month. This is before the tax benefit which brings it down to approximately €200. We felt this is a no-brainer and are happy to fix this ridiculously low amount for the coming ten years. Ten years might be enough to save up enough to pay off the rest of the mortgage!

What the bank does not tell you

Back to the example mortgage. There is nothing wrong with the bank's argumentation. But there is an additional advantage if you pay off your mortgage faster than the standard 30-year plan. And it is rather big. 

Debt left when paying off €200,000 in 25 years with a 2, 4 or 6% interest rate.

In the graph above the mindset off the bank is like the majority of their customers who will remortgage and struggle for 25 more years to pay their mortgage. Afterwards the full mortgage is paid off, regardless of the interest rate. No need to take this into account in the remortgage calculations as their is no difference at the end of the full mortgage period.

Many people in the FI community are paying of their houses much faster than the standard plan.  This is where the magic happens. If someone decides 15 years from now (in 2033) to pay off the remainder of the mortgage, there is a gap in what you owe the bank depending on the interest rate you paid along the way. This gap between 2 and 4% interest is €12,000 and that amount roughly doubles looking at 2 and 6%. 

This is awesome! By paying less interest for 15 years you end up in a situation where you owe the bank less. If this is not win-win I don't know what is!

Financial update Q3 2018

With the blog launched and Q3 ending, it is time for the very first update on our personal financial status!

Savings rate

How we calculate our savings rate is explained in this earlier post. Our monthly savings rate has been steady at 35% in 2018. Great to see we invest 1 out of every 3 euros in our future rather than stuff we don’t need. Considering the non-regular money coming in, we used the holiday money for holidays and the tax return is still parked in a saving account. We probably will “invest” the tax return in a mortgage hack that I will blog about in the near future (UPDATE: see here). If we do so the yearly saving rate will drop below 35% but will certainly stay above 30%.

The mortgage

As reported here we have been investing in paying off the mortgage with most of our money until the beginning of 2018. We have paid off approximately 30% of the initial mortgage by now. See a great post here doing the math of mortgage down payments vs. index fund investing. We have reached the tipping point. Our mortgage payments are comfortably low and include annuity payments anyway. The mortgage will take care of itself in the coming 26 years. The money locked up in the house is not included in the journey to FI number, it just helps to keep the FI number low as a future paid-off house will mean we need less money for a comfortable life.

FI percentage

Dedicated investing in the low-cost exchange traded fund VWRL will be the way to go from here! Our FI number consists of our emergency cash fund, VWRL and my defined contribution (DC) pension. Have a look here why I feel I can include my DC pension in the FI number. That being said, our current FI percentage hovers just above 16%. With the bull market raging for a decade now some head wind would not be unlikely in the years to come which would only make the journey more interesting to follow. 

It's all relative 

The inset of the figure above presents the relative amounts of our net wealth in real estate (house WOZ value – mortgage), our cash emergency fund and ETFs. We are aiming to get the ETF percentage up but the booming housing market is not helping 😉

Backtracking 2016 & 2017; paying off the mortgage

With both of us working 4 days a week we had found a nice balance between family and work life and more than enough money was coming our way. 

How low can you go?
Our mortgage interest rate had a risk increase of 0.4% because of our loan to value (LTV) of 90%. Inspired by Gerhard Hormann it seemed silly to be considered a risk by the bank and we started using our savings to pay off the mortgage. Helped by the booming housing market our LTV decreased below 67.5% in mid-2017 which meant the 0.4% was alleviated from the mortgage, leaving us at a handsome interest rate of 2.9%. The urge to pay off the mortgage faster than the annuity vanished (the house will be paid off in 30 years anyway).

The FI journey really starts
At this point in time I had found the FI concept and read everything I could. I am a logical thinker and a number fetishist; finding the stock series by Jim Collins and Karsten’s save withdrawal rate blog posts tools sealed the deal, as  these tools allowed me to do the math to establish the most sensible plan and stick to it. That’s why from now on you’ll find that most of our savings are directed towards the low-cost exchange traded fund VWRL.

Backtracking 2008-2015; growing up while financially screwing up

After some initial hick ups (imagine my first Monday morning stuck in traffic after 12 months of traveling) the routine of working life kicked back in. A decent income led to some sort of a savings rate that cannot be backtracked precisely. 

How not to invest

I had had an earlier bad experience with a financial advisor (for you Dutchies; think woekerpolis!) so at least I was aware I would be better of sorting myself out. This kept the costs of my investments down so at least I got that right.. However, it turned out I suck at stock picking and timing, which I now know is true for almost everybody. Arguably, the market nose-dive because of the financial crisis was not helping and I chickened out disillusioned around 2010.

What really matters 
I was more successful in other areas of life and had met my girlfriend (by now FI partner in crime) and by 2013 we had our first child (the count is stuck at two at the moment). We initially rented a small and expensive house but in 2014 the financial crisis had drawn down housing prices and interest rates by so much that an annuity mortgage on a semi-detached house would work out cheaper than renting. Whether that is really true when you include maintenance can be debated but we took the plunge and bought our family home and don’t regret it one bit. 

The money we had been able to save from 2010 onwards was used to pay for the costs involved in purchasing the house (tax, mortgage, formal documentation etc.) and to pay 10% of the house in cash. The leftover cash was mostly used for renovations. With 90% loan-to-value (LTV) our mortgage had a 3.3% interest fixed for 10 years.