This month is a big month for us! We are repaying a portion of our loan in advance. But the question is, why are we repaying in advance the mortgage and it this still a good idea in 2022?
Our mortgage facts
For those who don’t know the story, we bought this house at the end of 2019 with a loan that has a very big period of repayment, The initial period of the loan was 30 years.
Initially the plan was to fully pay the mortgage in 6 years, because we weren’t sure we could keep our businesses overseas while moving to Portugal.
Last year we repaid a portion of the credit and managed to shave 6 years of our credit loan. This year we are planning to repay around 20.000 euros, and this will deduct another 4 years from our total period of the loan.
After this year repaying, we will remain with a period of the loan of 17 years. Which is still a very long period!
why we pay our loan in advance?
For us it’s not easy to have such a big debt over our heads. We cannot know what our income it will be in the future with all the changes we are making in our life. We would prefer not to have this expense over a period of 17 years. I guess a period of 5 or 6 years would be more easy to digest for us.
But the majority of this decision is based on emotion. It’s our fear of unknown, of the future. It’s the way we were raised to think that debt is bad. We have lived more years not knowing about financial planning than knowing. The information is new. Sometimes, especially in uncertain times, we loose our confidence, we get scared. We feel the need to fall into old patterns.
We feel the need to do what everybody is doing – being safe over being smart.
Careful is not always smart.
– I said that –
what are we doing differently this year?
Our interest rate for this mortgage is 0,697% per year. This year it’s actually decreased from 0,0070% per year last year. A small decrease, yes, but it was a nice surprise! We expected interest rate to go up, looking at what is happening in US and in the world.
So, the interest rate is very low, practically free money – in our opinion. With such low interest, in 2022 we decided that it’s best to focus on our investments rather than repaying in advance the mortgage. We will redirect a much bigger portion of our income to investments and we will pay less to the bank.
If you ask me, with such lower interest rate we should not be paying anything in advance to the bank.
– still me – I said that too! –
But we still do it, we still give a portion of the money in advance to the bank, against our better judgement. We do it because of our emotions, to feel safe in the future, to shave as much years as possible of that awful 17 years number now, when we know we have a steady income.
And also because we don’t know if this interest rate will remain the same in the future. If we could have this guarantee, than we will not be paying anything in advance to the bank, but as the situation stands in the world, anything can happen.
We have a mortgage with a fixed interest rate per one year. Our rate is set for one year, at the beginning of each year. So in 2022 we are good, but we don’t know what is coming.
What’s best for you?
The question is, what are you going to do? What is best for you? As we see it, this decision is very personal and must be tailored for your individual need. But here are 3 pros and 3 cons for paying your mortgage in advance, and maybe this will help you decide!
Why you should not pay your mortgage in advance
- Investing instead of paying down debt will increase your buying power over the long run.
When your are paying your mortgage you are essentially gain the equivalent of your interest rate. So in our case, we earn 0,69% per each year we shave of our loan period. When we invest this money we gain… well, depends on what you invest! The stock market produce an average return of 8% yearly, but in the last 2 years the returns were insanely high!
Considering this, It seems foolish to actually pay your mortgage in advance!
- Mortgage rates are near record lows right now. Like I said free money!
Even if you don’t want to invest, the cost of the mortgage is very low, so you can keep the mortgage just because it’s so cheap and wait for the inflation to work it’s magic! Like I said, free money!
Why you should pay your mortgage in advance
- No more monthly payments
- You own your house
- Peace of mind
So you see, the decision is very personal. And if you can keep it as much as possible more brain and less emotion. It’s what we are trying to do this year.
If you want to see a piece of epic bureaucracy in Portugal, watch this video with the story of us, repaying the loan for the first time in Portugal! That was quite a day and quite an adventure! Fortunately in the meantime the bank got used to our request and everything went smoothly the second time around.
I hope this helps, leave the questions in the comments!