Maximum or Minimum Deposit

We are looking to buy a property. We could put down up to 33% of the purchase price. Now I am wondering what the best strategy is.

1/ Put in the maximum deposit and pay less monthly interest and rebuild our VT holdings
2/ Put in the required minimum 20%, pay a bit more monthly. keep some of our VT investments and also build them back up.

Some other key data :

  • We have quite a high taxrate in Vaud and the interest is tax-deductible
  • I “loan” some private capital to our “mariage” to make the purchase. The mariage then pays me back over a period of time with what we earn.
  • Buying a house is more a lifestyle choice than an investment choice. I believe we will build more wealth with dollar cost averaging into VT to I want this to remain a cornerstone of our networth.

Thanks for your insights and analysis. If you want to simulate, can provide some numbers.

There’s not much to analyze with that information. It comes down to your expected returns, and more importantly, your personal risk-bearing capacity and tolerance.

Let’s say you can borrow at 2% and got 40% marginal tax. That’d be 1.2% interest net. With 33% down, maybe you get a slightly better rate. Generally, you’d expect to easily beat that with VT.

I’d recommend a quick sanity check: As a renter, would you be comfortable to take a margin loan at 1.2% for this amount to leverage your portfolio? If the answer is yes, you should be fine with minimum equity. If not, pay down up to your level of choice. The maximum would be 100%, not 33% :wink:

A middle-ground might be minimum down-payment combined with buy-ins to your pension fund, instead of keeping the whole difference in stocks.

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Depends on what other assets you have. Putting it into the property locks it up and it is illiquid/inflexible. If you have tons of other liquid assets, this is not a big deal. Otherwise, it is worth considering.

3 questions I would ask my partner and myself:

  1. Dependents: can my family handle the mortgage in case of death of the main breadwinner? In case of disability? What happens if both parents die at the same time (make it a car crash)? Part of the answer to that may be insurance, part of it may be how big of a mortgage you are willing to take. I’d use the higher bracket of interests, at 5%, to assess that, as we don’t know what the future may hold.

  2. Asset allocation: for the purpose of choosing your allocation, I’d consider the mortgage as a negative bond. Do you want a more agressive allocation (higher mortgage) or a more conservative one (lower mortgage)?

  3. Alternatives: The mortgage money could be invested in conservative assets (cash, bonds, bonds funds, medium term notes, Pfandbriefe, etc.) or agressive ones (stocks or others). I’d compare those expected returns with the interests you’d pay on the mortgage, both corrected for taxes. I’d keep in mind while doing it that fixed rate mortgage interests are guaranteed, as are bonds coupons or locked in medium term notes interests, but that stock, SARON rates and other investments returns are not.

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Thank you all for your insights. I am leaning toward a minimal downpayment and keeping VT as the main wealth-builder.

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Why a negative bond? You have an offsetting return, in the form of not having to pay rent.

The return comes from the house (asset side of the equation). How you finance that is a separate question that doesn’t impact the return on the asset (e.g. via debt: the mortgage, or equity: mortgage-free).

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Slightly related, but what’s everyone strategy with regards to mortgages and retirement?

As I understand it, it will become difficult to get/renew a mortgage once retired (either due to reduced income and thus qualifying for a lower mortgage, or simply because banks don’t give mortgage to old people?).

Is the standard strategy to simply sell the house and take the opportunity to downsize?
Or to use the lump sum of the pension plus whatever savings required to pay back the mortgage?

Pay off the mortgage and maybe downsize.

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Do you already have a lombard loan and/or invest in leveraged ETF? If not, your risk capacity is 100% shares max. Otherwise, you would have already levered yourself.

So if your risk capacity was 100% only… why do you now all of a suddent think you had a higher risk capacity? Nothing changed.

Pay the house with your VT holdings. You can then still decide if future savings go against VT but not the remaining Mortgage. If you feel that putting this much VT money in your house was a bad Investment and you rather want to keep the money in VT - instead of taking out leverage you better re-consider if it was not too much house you are buying.

Logic behind it? Leverage always counts against the highest risk asset. Yes, the mortgage is taken out against the house, but for your Personal accounting and financial wellbeing, the mortgage counts against your VT holdings but not the house. Do you have the balls it takes to lever up on VT?

There was a previous (very short) thread about this, and I still stand (and live) by my answer that nobody challenged :wink:

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