FIRE and buying a house

[element532]

Hello Mustachians,

One our goal along with FIRE is to buy a home in CH, mostly around ZH area since we have several family members there. Now I estimate it will take us around 7-8 years to accumulate sufficient cash for a 20 % downpayment. In the monthly budget from the total savings we are allocating 50% of the savings to our investment portfolio and another 50 for the home purchase. I was wondering if this mix is appropriate. How are you guys handling the goal of a home purchase as part of the FIRE pursuit.

[Grog]

We are not pursuing actively. I guess the plan is to save as much as possible, invest in stock index fund, and in 10-15 years we will decide if it is a good moment or not to buy, if to even buy. And if the estate market is overpriced and stocks are tanking, we will wait the recovery.

Where do you plan to keep your 50% for real estate, as cash?

[element532]

Currently we are parking the real estate portion is Cash since that seems to be best risk averse option. I am thinking using a Total Bond Market fund alternatively.

[glina]

One our goal along with FIRE is to buy a home in CH, mostly around ZH area since we have several family members there. Now I estimate it will take us around 7-8 years to accumulate sufficient cash for a 20 % downpayment.

One thing to remember - once you are FIREd, you no longer have the income to satisfy the affordability criteria for having a mortgage. Therefore, you will most likely need way more than 20% downpayment or enough assets, held with your bank, to pledge.

[Grog]

Yeah I wouldn’t put into bond if you want to cash out in 8 years. Interests rate are more probable to rise than get lower, and if interest rates rising, bond fund are tanking.
On the other hand you have 8 years opportunity losses VS stocks.

[element532]

Blockquote One thing to remember - once you are FIREd, you no longer have the income to satisfy the affordability criteria for having a mortgage. Therefore, you will most likely need way more than 20% downpayment or enough assets, held with your bank, to pledge.

Thanks to the discussions on this forum, I am aware of this catch. In fact I am planning to FIRE only after paying off the second mortgage (remaining part of 33 % of the home value excluding the downpayment). One question I do have is whether the bank will be okay for us not amortising the reminder of the loan (67%) and only making the interest payments. Do they perform the mortgage affordability check (based on 33% of gross income) periodically even after retirement?

[element532]

I realise that definitely there is risk of the risining interest rates, but in this case we would be prefer to preserve the capital with minimal growth than take more risks on equity side. We already have our main portfolio invested 100% in VTI,VUG,VXUS and XLK

[glina]

Do they perform the mortgage affordability check (based on 33% of gross income) periodically even after retirement?

They usually check affordability on any renewal of contracts. Even if you lock your mortgage for 10years, the affordability check will catch you sooner or later. Better to have more assets than the property is worth so you can pledge or risk losing the mortgage contract.

[element532]

They usually check affordability on any renewal of contracts. Even if you lock your mortgage for 10years, the affordability check will catch you sooner or later. Better to have more assets than the property is worth so you can pledge or risk losing the mortgage contract.

From another post it seems that banks apply a discount factor of .5 for stocks, so ideally we should have at least 2X of the outstanding mortgage in our investments. Do the banks consider passive income for example dividends into account or this check ?

(Income from employment + passive income) * 33 % > (Mortgage Interest 5% + Maintenance 1 % ) of the mortgage.
Where do the value of the stock portfolio comes in this above equation

[glina]

I think you can consider a broader basket of assets, including Pillar 2 and 3a investments, not only stocks.

The main limitation will come from stocks having to be with your mortgage provider which will probably have a custody fee and suboptimal choice of products to invest in (for example, no US-listed ETFs). I don’t know if dividends make any difference for the calculation.

[nabalzbhf]

I am thinking using a Total Bond Market fund alternatively.

By the way, this seems like a bad idea. If this is CHF-hedged you’ll be hit by the negative interests, if not, you’re carrying a lot of currency risk which kinda defeats the point.