Our bank was very ‘encouraging’ towards me and my wife to get a bigger mortgage and/or less downpayment when we got our mortgage but we took a conservative approach on purpose.
We moved into our newly built house 2+ years ago:
30% downpayment
Additional 10% extra payment to reduce the mortgage when a severance came
And we’re on track to get another 15% amortized as we built that in our mortgage
…by the time we own the house 5 years we’ll have 55% paid down (we also self-finance various extra investments in the house). Our intention (post the first 5 years of ownership) is to pay down another 10% (1% / year) so by the time I’m early 60’s (my wife is considerably younger) we’ll have 65% paid off thus 35% LTV. Realistically, at that time (given realized price increases and expected price increases) the LTV will be well <<25%.
We were very aware that putting a lot of that money into investments would have generated a better return but wanted ease of mind. In particular, we were worried about the risk of a very high mortgage coupled with a market crash impacting equities. We also did not want the bank to have us by the proverbial balls (more on that later) and did not want to risk financial strain from potential interest rate increases.
On the balls point - the reverse has now happened, paying down allowed us to get more leverage vs. bank when negotiating some changes to our mortgage. Additionally - benefit of hindsight of course - with the interest deduction disappearing in due course we’re also happy to have made a good effort already to run down our mortgage.
More recently, I’m also thinking that upon also my wife retiring (I don’t work full time already, just some advisory work in addition to writing options:)) we don’t want the bank to have strong arguments to push us into paying back the entire mortgage based on affordability calculations. Getting the LTV down (and eventually fixing a long term low interest rate) should help with that.
My question to the group:
What’s your target LTV ratio?
What’s the rationale for that?
Any regrets / advice?
I’m really interested in hearing different perspectives. My sense is that with 55% paid off after 5 years we’re further ahead in reducing it than most and I assumed that in Switzerland it’s normal to essentially never pay off your entire mortgage, but perhaps that’s just stereotypes.
I do it the other way around - bougt an appartment with my wife at a regular 20% LTV - 20% was hard cash and pledging 2nd pillar wansn’t possible (less than 20K in it). Pledging the 3rd pillar wasn’t wanted by the bank, as I would have to move it to their shitty 3a solution. The bank was not willing to provide me with a >80% mortgage.
Purchase price was 825K - Mortgage 660K SARON + 0.8% and the remaining 165K I actually took out as a mragin loan at IBKR (Rate is around 1.3%). This is a bit of a “life hack” to buying property I guess, but I wanted 100% LTV and I was getting it one way or the other. Together I’m at about 0.9% blended interest rate on my loans - or about 7425 CHF/year.
Fun fact is that almost 1/2 of the 165K is already paid back by stock appreciation - so I had ultra lucky timing I guess, but this is not a reccomendation and only can be done if you have a large enough portfolio. I also plan to continue to invest further into IBKR and reduce my leverage ratio over time by doing that.
Oh and the appartment is about 1/2 of our NW. This will also get smaller with time I guess. My “dream” allocation would be 20% max for our primary residence, but I doubt I’ll actually work that long .
Target LTV ratio: 65% (current is around 80%, I plan to manage it down in the coming years).
Rationale: it lowers the salary requirements by getting rid of amortisation while still freeing money for investing on the side. Personal experiences have taught me that I want as little exposure as possible to things that have salary as a requirement but at the same time, taking bigger risks with more leverage has more upside to me than failing would have downsides at the moment. My situation is specific to myself and people able to integrate lastingly in the job market may view things differently.
Regrets: none so far but my mortgage is fairly recent.
Advice: you seem to know what you want and to be doing well with it. Trust your judgment and do what you think is best.
Won’t there always be a bank driven salary or at least income requirement as they will model affordability eg
What if interest increases to 5%
And 1% maintenance
A way around that as some have done is lock in a decent low rate for 10-15 years - which i’ve done with part of our mortgagr (rest saron) and will do again once i get closer to retirement age
There will but I can more easily decide to lower my working percentage and take a lower salary if there is some available margin between the affordability granted by my salary and the actual mortgage requirements.
The 65% threshold allows to only deal with the 5% interests and 1% maintenance and not add up to 1% for amortisation on top of that.
Ultimately, I intend to get rid of the mortgage completely and replace it with a margin loan. My mega ultimate plan is to get rid of debt completely but that’s either very far into the future or won’t ever be reached at all.
The bank counted 4% of my NW as a salary (Vermögensverzehr). The regular requirenments are for the avg (financially illiterate) joe. If you get to a motivated salesman, he’ll figure a way out to make a mortgage happen. If someone sees you have like 400K+ in stocks, they’ll treat you very differently than a young couple scraping money from friends and family.
I got exactly what I wanted in my case - my gross NW doubled - so 2x the “money in the market” at a 1% intrest rate, all while not reducing my stock exposure at all. I also calculated the risks and we are able to service the loans pretty quickly if “shit hits the fan” as well.
To answer your questions (me stupid, didn’t read):
Target LTV: When FIRE, max 66% ig, due to lower affordability requirements
Rationale: I want 0 hassele when retired
Any regrets: I do not regret using margin. Did it 2x and 1x the risk adjusted returns were lower (total returns were higher), and now, I basically did a lucky draw
One thing: You probably don’t need to actually pay back 33% - instead, the new evaluations for your property will likely amortize it themselves over time. If you hold your RE for like 10y, you’ll end up at a 60% LTV or so, even with minor rennovations.
The inflexion point is at 65% (or wherever your bank will allow you to stop amortisation) because it takes away amortisation from the expenses taken into account for the affordability calculation.
I get the second part and i like the idea/discipline if continuing to eat away (ie reduce) the moetgage also when no longer necessaey, but help me out on the margin loan idea?
The margin loan is tied to my wealth, which I kind of can somewhat have a degree of control on.
The mortgage has salary requirements that can tie me to situations I don’t want to live. I guess I don’t have to actively terminate the mortgage and can take it for as long as my bank will be happy to have me but I expect to face complications at some point due to my… complicated relationship with employers and employment.
My autism has something to do with my situation and my expectations, as well as my desire to avoid complications and any contact with my lender that I can avoid.
I like simple and freedom and am willing to trade in risk for it.
My initial LTV is 95%. Over time (by retirement: 57-62) I just expect the property to increase in value and LTV to reach 64-66% (without direct amortization) in one of 2 ways:
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