I’m re-evaluating my strategy on the repayment of my SARON mortgage. It can be reduced flexibly with a few months’ notice.
When the rates were lower, the idea was to repay only the minimum, most of it indirectly via 3a and keep invest in stocks. I made a contingency plan if rates go up, but didn’t spell out the exact criteria.
Now that we do have higher rates and they might go up more, I want to specify the plan and look for additional inputs.
There are 3 pots considered
- ETF portfolio. This is risky but the expected return is higher than 2.5%. Includes part in pillar 3a.
- Pillar 2. For me, this is risk free. It currently yields 2%, tax free (ignoring the low tax on withdrawals). It grows with monthly contributions as employee.
- New savings, which could go towards the ETF portfolio or repayment
The conservative approach is to amortize using a combination of those 3. The more risky one is to keep the mortgage and keep investing. Of course, I can’t have my cake and eat it, so I’m looking for a solution in between.
For those who have a SARON or a fixed one running out soon, what are your considerations? Do you have some trigger points like the interest rates or your lending ratio? Or go one way or the other just because of it?
Happy to hear your ideas!
A rather simple rebalancing strategy, where you consider net value of RE (gross/market price minus debt) as a part of the portfolio and assign it a specific target weight, will work excellent I think.
The only inconvenience that I see with this approach is that I personally would consider the gross value of the RE for portfolio value calculation. Invoking an antithesis to the mental accounting bias, your net wealth is your total gross wealth minus your total debt, no matter how this debt is collaterized, by RE, stocks at IB or a credit card debt, you only care about keeping the interest you pay at minimum. Defining a constant leverage factor (gross wealth / net wealth) as a target could be a way to go, but in this case you would have to actually borrow more when your portfolio is growing . No, that’s probably not what you want.
Disclaimer: I don’t have a mortgage (I’m a renter).
Edit: I’m putting in too many words. The tl;dr version is that I would consider the mortgage like a negative bond. If buying bonds yielding that rate looks attractive to me, I would amortize the mortgage. If they don’t, I wouldn’t do it. /Edit
I would think about it with the mortgage being considered like a negative fixed income vehicle/bond.
If you don’t want bonds in your allocation no matter their prospects, you might as well keep the mortgage and invest in something else (like the equity ETFs you mention).
If you already consider bonds as part of your target AA, then it is a matter of whether you would get better returns buying more of them or amortizing the mortgage. Whatever the higher interest rate projected on the relevant term is wins (most 2nd pillar plans have interest rates fixed annually so their rate would be directly comparable with the one of the SARON mortgage. A fixed term note or bond would not and would require you making assumptions about the direction the SARON rate would be taking during their duration).
If you don’t have bonds but would consider adding some depending on their rate of returns, at what rate of returns would you consider it a good deal buying bonds rather than equities? (I know it’s the question you are asking but turning it around and considering buying bonds rather than amortizing the mortgage may give another perspective on it).
I’ve considered buying bonds myself, thinking we may be close to an interest rate top and that it may be worth it to secure it for the future. I’ve not pulled the trigger and happily keep investing solely in equities: my consideration is that the expected 5% return I have for equities is the mean of all the returns over the relevant period. If I get into fixed income on expectations of returns (rather than in relation to my risk assessment, which should be done and would fully justify holding them), I might miss out on some 30%+ years that have made the long term 5% return of stocks historically.
So if I want to hope to get an expected 5% return on stocks, I have to keep investing in them in accordance to my chosen allocation even if bonds’ rates get high. Otherwise, I can’t expect the long term market average returns for my stocks anymore and all bets are off.
That being said, I would get out of stocks and buy bonds if long term ones (20+ years) where returning 5%+. That’s long enough an horizon for me to consider it like a full investing period.
I will seize an opportunity and will ask you something that interests me. Can you also borrow flexibly with the same notice period? I was looking at flexible SARON mortgages and thinking if it can be used as a credit line or “inverse savings account”. The idea would be to only keep some emergency cash and, besides stocks investments, to gradually repay that SARON mortgage, but to also be able to borrow more if you need more money within few months.
For institutions it exists. Unfortunately, I could not find anything for private ones (except the margin account of IBKR, which is basically what you are looking for).
Good point. Without a mortgage, I would stick to my asset allocation, whether the safe part yieldy 0% or 5%. In the basic theory, you would expect a risk premium for equity either way.
But it doesn’t make sense to pay 2.5% for a mortgage while sitting on government bonds long-term that yield below that.
So far, I skipped bonds in favor of pillar 2. For me it has a similar character but is more attractive.
The property I don’t consider as part of the AA. It’s more like pre-paid rent to me. That makes it an asset, but then you wouldn’t consider your rent as a liability, but rather an expense, right?
Both your comments led me to an idea. Instead of starting with returns, I’ll consider expenses first to get some rules for the next years
- Pay back mortgage from new savings if housing expenses (interest, running cost, imputed rental value) are above 20% of income
- Pay back also by reducing existing stocks if housing expenses are above 30% of income
- Withdraw pillar 2 if return becomes lower than interest rate after taxes (rather unlikely)
- Only then go back to invest new savings according to asset allocation, but skip fixed income if yields are lower than interest (rather likely)
I think you can increase within the property lien with the need or pretense of some renovation, but doubt you can use it like a flexible credit line back and forth.
Above the lien, you likely need a new evaluation process with the bank and entry in the lend registry at the notary.
If you can incease, there shouldn’t even be a notice period, banks seemed quite eager to lend you money if credit worthiness is there. Haven’t asked the bank though how it would work. It’s likely easy for them to answer via phone or mail.
My NW consists of assets of 115 (shares, property and 2nd pillar) and debt of -15 (mortgage debt and Lombard Loan).
I do not plan to repay any mortgage debt because the rates are still incredibly low and I am comfortable with this level of gearing. I believe the odds are in my favour that my investments will return more than my debt over the mid to long term. I am in full employment
Another way to calculate assets allocation to determine the balance between the mortgage repayment and investment, that I might use myself:
- Ignore RE value
- Calculate net fixed income exposure: 2nd pillars + bonds + cash accounts + … minus all debts.
- Calculate stocks exposure
- Keep a fixed allocation between net Fixed income and stocks.
If you choose positive fixed income allocation, you repay your debt with time. Unfortunately it also means wasting a wonderful opportunity to invest borrowed money on leverage.