I own an apartment in France, which is currently rented out and generates a strong cash flow. While the apartment has appreciated nicely, I find myself with a lot of equity locked in the property that could be put to work elsewhere.
My Swiss bank has offered an option to take over the mortgage and provide a HELOC, giving me a chance to unlock some of that equity to invest in the market. I’m tempted by the idea of putting the equity into long-term investments, but I’d like to get your input on whether this is a sound strategy, considering the risks.
My Situation:
Apartment in France : Valued at €700k with a €120k mortgage remaining with a French bank. I have a majority equity position.
Rental Income : The apartment is rented out and easily cashflows positively, with about 30k annually.
Swiss Bank Offer : My Swiss bank has offered to take over the mortgage in CHF and provide a HELOC option for up to 50% of the property value, allowing me to take out up to €350k as cash while keeping the rest in the property.
Interest Rates : The SARON rate is around 1.5% today. Since I would keep 50% equity in the property, the mortgage would be interest-only on the remaining 50%.
Investment Plan : I am considering taking the €350k from the HELOC and investing it in a diversified ETF portfolio.
Benefits:
Positive Cashflow : Rental income would easily cover the interest payments (4x).
Long-Term Market Growth : I believe the ETF investment would generate higher returns over time than simply having my equity locked in the property.
Tax Savings : I can deduct the interest payments, reducing my taxable income in Switzerland.
Property Appreciation : I would still benefit from the appreciation of the property over time, even with the cash-out.
Am I underestimating the impact of leveraging my property equity? This feels low risk, in addition to the rental income 4x covering the interest payments, the dividend income alone on something like CHDVD would cover the interest payments.
Isn’t currency risk one of the potential issue? (might not be such a big deal given other swiss income, but it adds some risk when the rental cash flow is in EUR)
I’d love to better understand your perspective on why it feels so risky.
To me, it feels more like a shift from real estate to the market. I agree that the market can have higher volatility compared to real estate, but I’m still holding onto some property equity. Could you share more about which specific risks you see as most concerning (e.g., market volatility, leverage, currency risk)?
Because it is in Euro & currency risk?
Otherwise I don’t see any difference between these two scenarios:
Buy a property with mortgage (e.g. 60%) & rent it out. In parallel and over the coming years, still invest in the stock market.
Take up a mortgage on an property (currently 17% mortgage) to get to 60% mortgage. Invest this amount in the stock market.
If you see a difference here, then wouldn’t that mean that everyone with a current mortgage shouldnt invest in the stock market but instead first pay back the mortgage?
I guess the bank offer is from CA Next Bank?
Sounds a good idea but definitely not with a CHF mortgage. On their website they are advertising this kind of offer with EUR also.
Sounds less risky to me! You’ll end to pay more interest but these are deductible and interest rate difference suggest the market expect CHF to appreciate by 2% per year.
You’re right, CA Next Bank Indeed there is currency risk, but the EUR interest-rate is double the CHF rate. So it probably works out about zero net net.
I’m still working to identify the risks involved here. Aside from the currency exchange risk (which is non-negligible but mitigated by using a EUR mortgage), it feels similar to simply not having initially repaid part of the original mortgage.
Currencies for assets, incomes and liabilities not matched:
Property value in EUR
Rental income in EUR
Mortgage and interests in CHF
Salary in CHF?
Stocks in… whatever the source of income and expenses of the individual companies are in.
Dividends, same as above (they distribute it in a given currency but the amount they have to distribute depends on the currencies the individual companies distribute their dividends and do business in).
Leverage:
2x leverage is pretty high in my book (but tame for real estate standards in Switzerland). The overall asset allocation is relatively conservative (I consider unlevered real estate as 25% cash, 40% bonds and 35% stocks based on backtesting).
Interest rate:
Interest rates can raise, increasing the cashflow needed to make good on the mortgage interests.
Loss of value of assets:
A devaluation of real estate and/or stocks can happen, in which case, the leverage ratio would increase and immediate amortization may be required, forcing the sale of stocks at a bad time (when they’re low).
Loss of income:
Rental income can cease abruptly (vacancies - given the price of the appartment, I imagine it being located in a big city and the risk of vacancies being low - / the appartment being in a state that it can’t be rented (for example due to required works). It can also get lower due to a various amount of factors.
Professional income can be reduced or cease completely due to various circumstances.
Legal risk:
The respective legislations in France and Switzerland, including tax treaties, can change, changing your situation in a meaningful way.
Increased liabilities:
Heavy works may be due on the appartment in a short time, in which case you’d have to find a way to finance them and potentially would need to sell stocks. You may get ill or disabled, in which case your income would decrease at the same time as your expenses would increase. You can get other liabilities (new children, others).
Overall, it’s the conjunction of the risks that would make me ponder before going through with it. A crisis where real estate prices go down, stocks prices go down, interest rates go up and more people get laid off is a possibility. That would put you in a pretty bad situation.
Many of the risks you’d be exposed to can be dealt with with insurance. In particular, I would want to insure loss of rental income if it isn’t done already. The scenario I would be worried about is if repairs are needed that would render the appartment unusable but not destroyed (the insurance money wouldn’t cover the whole mortgage + HELOC).
I’ve realized that if I proceed with this, the currency risk applies only to the portion of the mortgage that will be repaid to my current mortgage provider in euros—specifically, 125k out of the 350k total. The remaining capital from the raised funds would be invested in a CHF-based index, which helps to reduce the overall risk.
Unless you invest in currency specific micro caps, I would consider stocks to be currency agnostic. They’ll ebb and flow depending, among other things, on the aggregate of the individual companies expenses and revenues (in their given currencies) as well as the currency in which they individually distribute dividends to their shareholders, irrespective of the currency of the fund. Even Swiss companies have sales outside of Switzerland and are not 100% tied to the CHF.
To my understanding, in your situation, the following items are allocated to a specific currency:
your income (CHF ?)
the rental income (EUR)
your mortgage balance (CHF)
the HELOC balance (CHF)
your mortgage interests (CHF)
the HELOC interests (CHF)
Your expenses, including taxes (CHF ?)
The maintenance, tax and other expenses related to the rental (EUR)
Any bonds you may hold.
The appartment itself isn’t directly tied to the currency of the country it is in (it’s a real asset) but is affected by the local situation (a devaluation of the currency may lower the buying power of the people in the area and exert downard pressure on the price of real estate). I’d consider it somewhat tied to both the economical situation in France (and in the local area it is in) and to the situation, which is impacted and impacts the situation of the Euro as a currency.
I think it is achieved in two steps but you are basically planning to take a loan of 350 K to invest in Equity markets. Your ability to achieve this loan is driven by your French property. Nothing really is changing for the French property. It was worth 700K and would continue to be worth 700K. The rent would be whatever is it.
I think all the discussion about Rental income in EUR but interest in CHF is distraction from the main question which is following
If you had no property, and if you were able to take a 1.5% SARON loan of 350 K , would you take it and invest in stocks? If the answer is yes, then I do not see many issues. If the answer is No, then this two step strategy should also not be executed.
P.S -: unlocking property equity is a fancy name for a loan in my humble opinion
Just looking at the real estate side, I wouldn’t take a CHF loan for a french property.
If the EUR keeps going down, the value of your real estate in CHF risks to go down. As a result your equity in the property might go down and the 350kCHF loan could become >50% of the property value, the bank might ask you to pay some of it.
Of course the value of the property might increase more than the loss of the exchange rate… but I prefer to keep it simple
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Indeed there is currency risk, but the EUR interest-rate is double the CHF rate. So it probably works out about zero net net.