Or how one must learn to do what’s right for them and not listen to all the noise.
If you’ve been here before, you may have already read some of my pieces, which are gathered under the title glorious title Money Talk. In short, I used to be really bad at handling my money and I’m getting better. I’m not here to give financial advice, I’m simply documenting my journey in the hope that, maybe, it will give you some hope that you can change things too, if you are struggling.
Yes, it’s a case of: if I did it, you can too! Yes, I was really bad. Still, I realise some people are in much worst situation than what I was.
In any case, I hope these help.
So today, I wanted to talk about something I did, which goes against most advice you can read online. It relates to the only debt my partner and I have, our mortgage loan.
Common advise on how to handle debt
The common advise on how to handle debt is either to not have any, or to at least always repay the one(s) with the highest interest rate. Most common advise will say that credit card debt is bad, mortgage to buy a home is good.
It must be said and repeated again and again that most articles online are written by Americans for Americans. The same may apply if you live in the UK, but it just doesn’t apply to many other countries.
Sure, even in continental Europe for example, some people fall for short credit lines offered by stores and end up piling them on top one another. But most people don’t. Most people stick to their banks, ask for a loan for a specific expense only, pay their credit cards balance monthly etc. because that’s how it is set up.
In lot of countries, people have different relationship to debt, than what seems common in the US. In lots of countries, we don’t even have credit score! It simply doesn’t exist.
So to an American reader who has a student loan, a car loan, credit card balances on several cards and a mortgage, what I did will sound stupid!
To people who manage their finances wisely and are comfortable, it will sound stupid too, actually! And yet, I stand by it and will continue on such track.
Goodness, what did she do? You may wonder?!
Drum roll?! … I made an advance repayment on our mortgage loan! And I intend to do some more!
I made an advance repayment on our mortgage loan
Please don’t scream and let’s start by remembering that I’ve always pride myself for being debt free.
Buying the apartment and getting a mortgage was ‘slightly’ traumatising for me. I say ‘slightly’ now, but I was a mess back then!
And so, fairly quickly, I set a new goal to reimburse this mortgage as quickly as I possibly could. Without selling the apartment obviously!
Want to have some details?
Here they are but you can skip because I don’t think it has much interest.
Our mortgage is split in 2:
- Almost half of our mortgage is a 5 year fixed rate loan at 1%. We can’t make advance repayment on this one, it has to be all or nothing.
- The rest (slightly more than half) is a variable rate loan. The interest rate was 1.25% when we signed. Went up to 2.5% toward the end of last year, has gone up to 3.6% earlier this year and further increase are expected. We are allowed to make anticipated reimbursement on this part.
Blended rate is still quite low and even with further increase of the variable rate, it will remain most likely way below 5%.
The amount I reimbursed represents almost 20% of the whole mortgage, a significant dent in my opinion!
I need to confirm somewhere that where we live, the tax incentive to have a mortgage is minimal. We’ll still benefit from this.
I also need to confirm that I made a lump sum reimbursement because fees apply to anticipated reimbursements. My bank actually waived such fees, without me even asking but if I had made monthly smaller payments, they would have charged them, no doubts.
Why would this be considered as a bad financial move by some?
Let’s first confirm that technically, I respected the rule that says to reimburse your debt with the highest interest first!
I know this rule is meant to be read in the light of credit card interest rate. Any interest rates above 10-15%, not debts with interest rates below 3-5%!
Still some would consider this as a bad financial move as, instead of reimbursing a loan with an interest rate below 5%, I could have placed this money and earned a return of 8-10%.
So why did I do it?
My reasons for such a ‘bad’ financial decision
Peace of mind and medium term planning!
Even when our variable rate was at 1.25%, I felt that our monthly reimbursements were too high. I insist, this was just a feeling! We didn’t have any issue with the reimbursement, we could make them comfortably, the bank wasn’t stressed out either. I still felt these were above my comfort zone. When the interest rate doubled, I hated it! When it went above 3%, I got nervous and yes, further increases could have become painful. But my plan was in motion!
When we signed the loan, the bank only took into consideration my partner’s income and the monthly reimbursement weren’t exceeding 30% of his net income (a rule many banks respect in Europe). Then, my income tripled. So indeed, our monthly reimbursement are now low compared to our household income. We are DINK after all!
Why did I get nervous then? Old habits I guess. My scarcity mindset issue not being resolved…
It’s fair to think that, but I also think that having such ‘huge’ monthly obligations toward a bank is just uncomfortable and unreasonable. More on this below.
Now, having made such an advance repayment brought down our monthly reimbursements to a level which I’m almost comfortable with. The next reimbursement I intend to do this year, will definitively put it in my comfort zone. And next year, we’ll clear out together, the rest of the variable loan and life will be grant!
Life isn’t a straight line and income doesn’t increase in a straight line either. Shit happens. You loose your job, you decide to change job, you get sick, you divorce… You may have to sell because you can’t afford your mortgage anymore. I don’t want any of this to happen. I want to be free of such worries.
Sure my partner and I both have funds available should something happens. It still would make me stress beyond what is necessary. Lowering our monthly reimbursement means we won’t have to worry so much, as one of us alone could easily cover the monthly reimbursement and still have money to cover both our expenses.
My ‘bad financial decision’ has a lot to do with the peace of mind it brings me.
Yet, part of such a decision is also linked to my medium term plans.
Honestly, I should first add that I want to be free from this variable loan to not give more money to the bank, than what I have to! I’m a bad customer!
Once this is done, I will be able to focus solely on my other goals.
I don’t think there is much interest discussing my other plans, since I’m still hesitant on certain things or looking for ways to implement. However I should confirm that my medium term plans included these anticipated reimbursements and other things were not put on hold for this.
For example, I haven’t stopped my online investments. It took me a while to be comfortable with these. By the time we finish reimbursing our loan, I should have enough knowledge and trust to do more. Yes, I’m slow – some would say I’m stupid – I think I’m just going at my own pace, only doing what feels right.
The take out
When you have no idea how to take care of your finances, it is a good idea to start reading an implementing common advice, like reimbursing your highest interest debt, building a safety net, etc.
You have to start somewhere and I feel you! I was bad, really bad, with my money until a couple years back. I’m still not great, but I’m working on it!
But I feel it is just as important to do what feels right to you!
Don’t want to get a mortgage? Rent until you’ve saved enough to buy cash if it makes you feel better. Move to a cheaper location, downsize, live a frugal life… This are all valid moves if these are your decisions, your plan.
Don’t want to invest in fossil fuel? I’m with you.
Are you focused on investing in yourself? Good for you! Don’t stop!
The list goes on.
You have to believe in your decision and it has to make you feel good.
It seems mandatory nowadays to add this sort of disclaimer so here it is:
This article is intended for informational purposes only, and should not be considered financial, investment, business, tax, or legal advice