€220,000. That’s my current (net) mortgage. Although I’ve got a nice and comfy home, it would be even better if I fully owned the place, mortgage-free. That’s why I sat down and set clear goals for each year to make that a reality. Financial freedom comes with taking small steps consistently over several years. It’s easy on paper but really hard in real life. But I will give it a go, anyway!
My current mortgage
My current mortgage is €260,000. I’ve saved around €40,000 in my mortgage savings account. So my net mortgage is €220,000.
In the Netherlands we have something like a blocked savings account you can use to save enough money to pay off the mortgage at maturity. It generates the same interest as the interest rate on my mortgage. In my case 4.3% (yes, I know, it’s a lot!).
When I took out this mortgage, I could choose to save 50% (only) of my mortgage (€130,000) through the tax-free savings account, generating 4.3% per year. There is no repayment obligation on the other 50% during the duration of the loan (30 years). Obviously, the bank will collect that money on maturity.
The benefit of this mortgage arrangement is that my mortgage of €260,000 does not decrease during the duration of the loan. I can deduct the interest expense of 4.3% on the full €260,000. Even though I saved around €40,000. On top of that, that €40,000 generates a return of the 4.3% tax-free!
A standard mortgage – paying off your mortgage gradually
My mortgage – saving to repay my mortgage at maturity
A benefit of €894 this year alone! And this benefit increases over time. I definitely understand why this mortgage option is no longer possible. It costs the Tax Authorities too much money!
Why even pay off my mortgage?
But if my mortgage is so advantageous from a tax perspective why would you want to repay anything? The reason is simple. I like freedom. I don’t want to live in my home by the bank’s grace. A bank gives you an umbrella when it’s dry, but wants it back when it starts to rain!
This makes sense from the bank’s perspective, but not from mine. In the unfortunate case I lose my job or if I just don’t want to work anymore, I will still be able to provide shelter for my family. Paying off my mortgage gives me options.
Having options is priceless! Life is too short to not be able to do what you want to do in life. You want no material things holding you back and make you stick to a 9-5 job you just don’t enjoy anymore.
But you don’t mind going to work? I can tell you this, there will be a time when you do not want to work anymore or simply cannot work because of health issues, etc. So you better prepare and be smart with your money!
The most valuable thing is life is time. You better do not spend a minute too much by working for your boss so he can do what you wanted to do yourself!
My repayment strategy for the coming 5 years
My strategy is simple. Deposit as much money in my mortgage savings account as is allowed under the Dutch Tax laws. The bandwidth of the deposits must not exceed 1-10. So the highest deposit in any year must not exceed the lowest by a factor 10.
The lowest deposit in my mortgage savings account was €2,000. So my highest deposit must not exceed €20,000. Simple as that.
To be safe, for myself and also for themselves, my bank applies a ratio that’s a bit lower than 1:10. About 1:9. So the highest deposit must not exceed €18,000.
In 2019 and the next 3 years I will deposit €17,500 each year. In the last year I will deposit the amount needed to reach €130,000. I’m not allowed to deposit over 50% of the mortgage.
As soon as I reach the €130,000, I will use that money to pay off 50% of my mortgage.
What to do with the remaining 50%?
To be frank, I’m not sure yet. In 2024 my fixed interest rate of 4.3% will expire. I expect the interest rates to still be very low in the coming 5 years. So hopefully I can fix the interest rate at about 2.5%. Time will tell!
At that interest rate, from an economical perspective, it makes sense to delay any repayments. Inflation will do its work and will ‘eat away’ my loan. But probably I will pay off at least €30,000 to break through the psychological limit of €100,000.
With €100,000 remaining at an interest rate of 2.5%, my monthly net mortgage expenses are €100 a month. No problem at all!