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 😉
There is certainly a chance of a good return. But there are risks associated with it.
ReplyDeleteYour article reminds me of a quote from Warren Buffet:
But to make money they didn’t have and didn’t need, they risked what they did have and did need.
Love that quote! Thanks for sharing.
ReplyDelete