[BG][EU] Loan repayment strategy in current market

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vstariradev
Posts: 58
Joined: Wed Nov 02, 2016 9:43 am

[BG][EU] Loan repayment strategy in current market

Post by vstariradev »

Hi,

I've recently decided to stop renting and buy an apartment using a bank loan. I need some ideas on how best to split the amount I pay and the amount I borrow from the bank. Also on what repayment strategy is best to take. Here are the details:

Apartment price: 350k EURO
Variable loan interest rate (including insurance, fees, etc): 2.98%
ETFs: Substantial percentage of the total apartment price in all world stock ETFs (EIMI, IWDA and VWCE)
Other loans: None

Option 1 (optimistic): Sell just enough shares so I have the sum required by the bank so they give me the loan (35k EUR/10%) and repay the loan slowly. The rest of the income will go into ETFs. This way the ETF will "hopefully" be generating income above the bank's interest rate.

Option 2 (pessimistic): Make a bigger initial down-payment and prioritize repaying the loan over ETF investments. The bank's variable interest rate is based on Bulgarian Central Bank's interest rate and can go up eventually, as what we've seen across the EU.

Given Vanguard, Buffett's predictions, it's likely that the global stock market returns in the coming years won't be anything spectacular. In fact, it's likely they could be negative. The second thing to note is that interest rates have been low for a long time and have started to rise again.

What option would you choose and why?

Thanks!
IcedTea
Posts: 92
Joined: Thu Mar 12, 2020 4:12 am

Re: [BG][EU] Loan repayment strategy in current market

Post by IcedTea »

Home loans are the cheaper loans one can get + while you can get a loan to buy a house you can't get a loan to retire.

Having said that, there's a lot to be said about the freedom of not having loans.

How much of your income will be spent on the loan? How much will the loan increase if interest rates increase? After covering your expenses are you still able to save enough to reach your goals?
Topic Author
vstariradev
Posts: 58
Joined: Wed Nov 02, 2016 9:43 am

Re: [BG][EU] Loan repayment strategy in current market

Post by vstariradev »

IcedTea wrote: Tue May 16, 2023 5:01 pm How much of your income will be spent on the loan? How much will the loan increase if interest rates increase? After covering your expenses are you still able to save enough to reach your goals?
I can go from 1/5 of my monthly income (option 1) to 2/3 of my monthly income (option 2) going to repayment based on the repayment option I go with. The loan increase will be based on the rates, but I suspect it could go up by 30% which still wouldn't cause any financial worries. I don't have financial goals but yes, I'll be able to save, I want to make the best financial decision in this case.
IcedTea
Posts: 92
Joined: Thu Mar 12, 2020 4:12 am

Re: [BG][EU] Loan repayment strategy in current market

Post by IcedTea »

On my first loan, I was saving to buy a house, so I simply put down as much money as the bank asked me to do. In my case it was 15%. I then learned to live with the fixed expense of having to pay loan, bills, ... And used any excess cash (company bonus, ...) To put down payments on the home loan whenever I can.

On my second loan, it was a different story. It was unexpected so I had to resort to my fixed income investment to have enough money to get the loan.

While spending 1/5 of your monthly income in your mortgage sounds low, 2/3 sounds way too high. I am not mistaken, the stress tests bank do in Portugal is to see if the mortgage represents less than 1/3 of your income.

With the amount of information you provided I doubt anyone will say: do option 1 or 2.

Start by creating your Personal Investment Strategy. If it is your first home loan, start small, adapt to the obligation of having a loan, understand how much money you'll need to cover all your monthly expenses and to meet your financial goals.

You can always pay your loan earlier if the situation changes. What you don't want to do is not having enough money to cover your loan.
hithere
Posts: 198
Joined: Sat Mar 31, 2018 5:30 am

Re: [BG][EU] Loan repayment strategy in current market

Post by hithere »

Let's say you have that 350K saved up and ready to deploy, and compare the extremes - a loan with 10% down payment and 100% cash purchase. In the first scenario, you would invest the 315K and gradually withdraw from it to cover your mortgage payments, hoping that by the time you've completely paid it off, there will be money left in the portfolio (not unlike retirement planning, I have to say). In the second scenario, you'd just use your 350K to buy the apartment. To put it simply, what we're comparing here is SWR vs. your variable interest rate. Regarding SWR, people seem to agree that it's in the 3 to 4% range. So will your future interest rate over the entire 20-30 years of the mortgage be lower than 3-4%? Unfortunately, this is anyone's guess. Perhaps if you have a stable career and/or don't mind taking a chance, you could take the investing route. Or maybe come up with a middle ground (say 50% down payment) if you don't like either extreme.
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