I’m considering whether it’s possible to increase my mortgage in order to free up cash and reinvest it into long term assets such as ETF. The goal would be to benefit from leverage, assuming the expected market returns exceed the mortgage interest rate.
My current situation:
I have a 10 year fixed mortgage that comes to an end in around 12 months.
Over the past decade, the value of my home has significantly increased, from 1’150’000 to CHF 1’600’000 (based on a recent evaluation of the bank).
Because of this higher valuation, I’m wondering if it’s possible to renegotiate the mortgage and withdraw part of the increased equity as cash for investing.
Has anyone here managed to do this with their bank or have heard of similar situation ?
There is nothing that intrinsically forbids it. From the financial theory point of view, it is a question of balance in assets allocation and leverage.
You will have to pay for the creation of a new mortgage note with a higher debt amount, that could be easily some thousands of francs.
When trying to increase the mortgage, most people fail at affordability calculations, that means you must have sufficient income.
Otherwise it’s up to you if you manage to negotiate what you want.
Depends a bit on other factors like age and income. But I would not recommend it, because you can get a margin loan at similar conditions anyhow.
Check out the IB rates:
You are way more flexible with a margin loan, can pay back every moment whenever you like. In theory you can pay back every evening and this way avoid to pay interest at all, exactly what day trader do.
you paid 20% out of your own funds (possibly with pension funds, shouldn’t really matter)
you have been reimbursing 1% of the purchase price/year (11’500) for 10 years, so you’ll have paid back 115’000 at the end of the current mortgage
your remaining debt will be then (920’000-115’000) = 805’000
your total gross income 10 years ago must have been ~>= 210’000 to satisfy affordability criteria: interests at 5% on 920k (46k)+maintenance 1% of purchase price (11.5k)+capital reimbursement (11.5k) = 69k = 33% of gross income
With that, you probably want to/can borrow at most 65% of the revised value of the house (so that you don’t have to reimburse capital anymore) = 1’040’000.
The new base for affordability would then be 5% of 1’040k (52k)+maintenance 1% (16k) = 68k, similar to when you purchased your home.
If your income has not gone down WRT 10 years ago, this should work for you and you would end up with 1040k-805k = 235k extra in your pocket.
Of course your numbers might be completely different and all the above will be rubbish
Which bank and what was the evaluation? Just moved from CS to UBS with mine, and they suddenly claim the value is 125% of purchase price, since 2019. I find that very hard to believe. Looking at very similar listings, I think it’s closer to 70%
But I echo what @cubanpete_the_swiss said, I think just getting a margin loan on IBKR is much more peace of mind due to flexibility.
Or the other way around? With a margin loan via IBKR, in the worst case scenario, you will have to make additional payments, otherwise IBKR will liquidate your portfolio. It can happen so quickly that you don’t have time to react. Mortgages are slower and give you time.
IBKR margin loan is definitely not peace of mind. IBKR can change margin requirements anytime and even call back the loan anytime, I don’t think a bank will do that.
I don’t know, but increasing the amount of my 10-year fixed mortgage for no other reason than to get extra cash seems rather risky. If you have to close the mortgage early it’s more pain.
You can always sell in order to pay back the margin loan.
Thanks everyone for the input. After re running the numbers with my situation, it looks like increasing my mortgage to extract some cash seems to be beneficial over the long run.
A margin loan don’t really seems profitable with interest rate listed at 4.88% on IBKR for USD. It might be a solution for short term investment. But I feel like the mortgage solution is far safer than the margin loan. A big drop in the market and you could loose a lot when they sell your equities at the wrong time.
I think the mortgage solution seems safer, because my house is in a very stable and desirable area, and the local market has historically shown no tendency to decrease in value. Even a conservative 2–3% annual appreciation provides an additional safety margin and increases my borrowing capacity without taking on excessive risk.
Based on my income and the bank’s affordability rules, I should be able to withdraw around CHF 200’000 without exceeding the 33% stress test threshold.
If that amount is invested in a broad ETF with an expected long term return of 6 or 7% per year, the projection over a 20 year horizon looks roughly like this:
Investment projection over 20 years
200k at 6% –> ~640k
200 k at 7% –> ~774k
Costs to subtract
Mortgage interest (stress rate is 5%, but real rate is lower)
With a typical long term rate around ~1.5-2%:
–> total interest over 20 years: 60–80k
Wealth tax (Vaud): roughly 0.2–0.3% per year,
–> around 30–40k over 20 years depending on commune
ETF TER + broker fees:
–> ~0.1–0.2%/year = ~5–10k total
Approximate net gain over 20 years
Depending on market performance, after costs and taxes the net outcome is still in the range of:
+300k to +500k CHF
(over and above the 200k borrowed)
So purely from a financial perspective, the long-term compounding remains very attractive.
Overall, using a moderate increase of the mortgage to invest for the long term seems financially sound in my case. Of course as long as interest rates stay reasonable and income remains stable.
Why you want the debt in USD, I suppose your mortgage is in CHF? I invest in USD but hold much of my margin debt in CHF for the cheaper interest rate. In fact over long term the interest difference is even bigger than the forex loss. Not short time of course.
If you increase both your debt and investment portfolio by the same amount, your net wealth is not changing. In these “mortgage and investment” schemes your wealth is only changing if you
withdraw from tax-protected 2nd or 3rd pillar to repay your mortgage or
borrow to pay more into them. This one might make sense for 2nd pillar sometimes, you should max your 3rd pillar every year anyway.
Besides, you can deduct “portfolio management fees” for stocks, but not for real estate.
Also check how the removal of imputed rental value and of tax deduction of mortgage interest is going to affect you. but it is most probably more beneficial for you
This one is an order of magnitude lower than the variability of investment returns, and is actually included (or, rather, excluded ) in the latter. You can see it in your own calculations. Can be safely ignored.
Yes, you are right, wealth tax is on net assets.
If I raise my mortgage and invest the same amount in ETFs, my taxable wealth stays the same, so wealth tax is basically neutral. It only starts to matter later if the ETF grows faster than the debt.
For the pillars: agreed, net wealth only really changes if you touch the 2nd/3rd pillar to repay the mortgage or borrow to pay into them. I already max out my 3a every year anyway.
About the removal of imputed rental value and mortgage interest deductions. I checked that too. It probably won’t happen before 2028, and in my case the impact on taxes is pretty small. Maybe slightly higher, but nothing meaningful for this calculation.
Thanks for the input! it helps me make the whole picture a bit clearer.
I can’t believe wealth tax is that low in Vaud. Are you sure you are looking at the marginal rate?
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) in the latter. You can see it in your own calculations. Can be safely ignored.