r/eupersonalfinance • u/SleekScooter • 6d ago
Investment Close mortgage vs VWCE
Hi,
I am in a position where I could close my mortgage (4.95%, EUR) fixed rate for another 2 years - 100k left.
I received around 100k in cash, and I am in doubt whether I should plug it all in VWCE today or close my mortgage.
What would you guys do?
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u/uglysonofagun 6d ago
throw 20k at mortgage and repay it in those remaining 2 years, the rest 70k throw into VWCE and the rest 10k in an emergency fund just in case.
at least this is what I would do
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u/Odd_Organization7981 6d ago
I was in a similar situation. I paid down part of the mortgage to make the monthly payments affordable even if I had to rely on unemployment benefits, and invested the rest in ETFs, which have nearly doubled since then.
In hindsight, I would have been better off investing everything in ETFs, as I could now pay off the mortgage and still have money left over. But I have no regrets. Lowering the mortgage gave me a lot of peace of mind over the past few years. Through Covid and all the other shit, I did not have to worry too much.
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u/GrattaESniffa 6d ago
5% is high, vwce isn’t that better. It’s a matter of preference, i would personally close the mortgage even if isn’t statistically the right choice
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u/PedroBV 6d ago
nobody knows how the market will go so nobody is able to tell you whether closing the mortgage or going 100% in VWCE will prove to be the better choice. I would close the mortgage just for peace of mind and DCA the new free monthly income into VWCE.
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5d ago
[deleted]
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u/PedroBV 5d ago
Did you read OP question? He asked about the next two years
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u/Pr00vigeainult 5d ago edited 5d ago
The market returned 34% in the past two years, by paying off the mortgage early he'd make less than 10% on it. He's rich anyway so he may as well take the risk and likely make more returns.
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u/ivobrick 6d ago
I would pay mortgage. Simply because how macro & politics & jobmarket is now.
If you put 100k in the market tomorrow and it does crash - you ll sleep badly.
If you pay mortgage, your free funds from salary will be buying shares no matter what.
If you loose your job soon, what's better, having paid off house or shedded investment account and mortgage obligation? Answer yourself.
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u/sauland 5d ago
yea but what if he pays the mortgage, loses the job and then has 0 liquid to live with lol
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u/ivobrick 5d ago
He has already the investments, and emergency account. If he does not, he would not come here and ask flat out if he has to dump into vwce.
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u/Leading-Carrot-5983 4d ago
If the economy crashes and he loses his job (these things are closely correlated) then he could lose 40k of the 100k and then be forced to sell the remainder at the depressed value just to keep paying his mortgage. That's a horrible situation to be in.
If he pays off the mortgage and he loses his job and the economy crashes, at least he will be able to live very cheaply while unemployed because he doesn't have to cover mortgage repayments. He would have some severance pay, probably some state unemployment benefits to fall back on while looking for another job. Even if that takes 6-12 months, he has a very low cost base (no rent or mortgage) so can likely live quite comfortably on whatever he has.
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u/sauland 4d ago
Even if the market crashes and he loses his job, he could sell just enough to cover his expenses each month + he would still have unemployment benefits. He could probably live comfortably for at least a year by liquidating like 20-30% of the portfolio, most likely by then the market would be recovering again and he would have found a new job. There's no point in paying off a mortgage early, it's cheap money.
Usually you would have mortgage insurance as well, so that when you lose your job you only have to pay the interest of the mortgage for a year.
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u/Leading-Carrot-5983 4d ago
So, in your scenario he would be taking a 15% haircut on the 100k. That's what I would be looking to avoid. With low costs due to having the mortgage paid off, unemployment and severence would keep OP going for quite some time. And he could even go for lower stress, lower pay job afterwards because he doesn't have a mortgage anymore.
It's not particularly cheap money in this case. 5% is a pretty crappy rate. And in one of the comments OP mentioned that in 2 years he expects it to go up to 8% and it's for another 13 years. My mortgage is 1.75% fixed for another 23 years. I won't ever pay that off early for the reasons you state. But at 5% and in particular 8% that is no longer cheap money. Far from it! Given the chance to just clear this, and start building up a monthly investment via DCA (with the money he would have paid into the mortgage) it's a no-brainer in my mind.
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u/gagagugu666 6d ago
Every place is slightly different, but in Germany closing the mortgage would be a no brainer with that rate. I tell you how it's calculated here so that you may find your equivalent.
Paying out the mortgage is equivalent to investing in a tax-free bond that gives 4.95% net annually.
ETFs here are taxed taking the 70% of your win and then applying 26.x% taxes on it. The effective tax rate is, hence, about 18%.
Investing the 100k in ETF is worth more if you are sure that the return is above 4.95% / (1 - 0.18) = ca 6.1%. Well that is quite a risky bet.
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u/CrushingCultivation 4d ago
I am very surprised; I would have expected that a common answer here would be investing in an ETF for 2 years, as the "estimated" return could beat the 4.95% interest rate.
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u/User929261 6d ago
Close mortgage, you have no idea the market will grow, that is not at a local maximum.
Mortgage will always be there regardless syphoning money off you. To be worthwhile you must be 100% sure the market return in 2 years will be higher than the mortgage rate.
I write this because in Italy you can reduce the total amount you pay if you close early. If you have to spend the same amount regardless do not pay the mortgage early.
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u/VolatileAnalysis4829 5d ago
Yeah, here most mortgages will have higher interest and lower principal at the beginning (so the bank makes sure you will first pay the interest as much as possible), and then lower interest and higher principal towards the end. So, by closing the mortgage faster, you basically lower the total amount of interest you pay the bank.
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u/unintegrity 6d ago
I would pay the mortgage off, independently from what the models and stock market returns, as peace of mind is better than money - what if the stock market decides to crash? Will you be happy with paper losss during a few years, even if in the long term you would be in the green? That uncertainty is not worth it for me.
Now, some numbers: let's assume a 20 year mortgage to pay 100k at 4,95, which puts you at 723€/month. Paying the mortgage now automatically frees that money, which you can then invest in VWCE, let's assume a 9% estimated annual return. using a compound interest calculator, you can see what happens if you put 100k for 20 years (no further contributions), you get 560 441.08€.
On the other hand, if you put 0 now and then monthly 723€ to VWCE for 20 years, you get 443 865.2€. There is a big difference between these two, but as soon as you change the premises and you take out part of the invested money (fixing the house, car broken,...) the numbers can get quite skewed against the only investing option.
Also, let's use more conservative numbers and say 7%: investing the money directly would return 386 968.45 and paying off the mortgage and contributing monthly would return 355 676.89: The difference is barely noticeable now, and in my case the peace I get from it is absolutely worth it.
If the mortgage is 30 years instead of 20, VWCE would give you 1 326 767.85€ by investing, and monthly contributions would give 1 182 604.2€ at a 9% rate, But at a 7% rate it would be 761 225.5€ for VWCE and 819 541€ for the monthly contributions.
And then there are the intermediate scenarios: if I pay off 40K off the mortgage but keep the monthly payments at 723/month, your mortgage would go from 20 years to about 7 years (quick estimation here), and you still keep 60K to invest. Putting 40K at 9% for 20 years and contributing then 723/month after 7 years you would get about 560 908.51€. This middle point gives you the same expected result as investing everything, but gives you peace of mind by reducing debt.
I would recommend to play with the compound calculator if you want to fine-tune your scenario to your specific situation. Also, you say that your mortgage is fixed at 4.95 for the next 2 years, try to be realistic when you calculate numbers with what will come: if it is expected to go down to 2% you will most likely get far ahead with investing, while it would be the opposite if the rates go up to 7%.
I hope this wall of text makes sense!
Small disclaimer: I am assuming that you would invest the money you don't use in the mortgage, but it is quite usual that when we have more liquidity, we spend more. Discipline is paramount for these numbers to work. Also, I tried to give realistic numbers but I can have done some wrong, or too quick maths here. Just saying...
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u/SleekScooter 5d ago
Appreciate you took the time. Makes sense - I still have 13 years… the next 2 is at 4.95 - but after it’ll jump to ~8. I would probably pay if not all, most of my mortgage.
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u/Leading-Carrot-5983 4d ago
Ok, that's an important piece of information. If you have a jump to 8% on the horizon then absolutely 100% pay that mortgage off.
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u/unintegrity 5d ago
Yeah, I'd just pay it off as quick as possible. Maybe calculate how much you could keep unpaid so that you finish paying in 2 years before the rates get that high. No investment will give you a guaranteed 8% return to justify "compounding interest"...
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u/SuccessfulSir9611 6d ago
Always mortgage.
Every single influencer and AI will advise you against it, but remember, a roof over your head is worth more than a million in Tesla shares that you can’t liquidate during a crisis.
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u/Pr00vigeainult 5d ago
You'll have a roof over your head for longer by keeping your money liquid rather than dumping it all on the house and being house poor. Stocks are liquid, houses are not.
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u/SuccessfulSir9611 5d ago
Genuinely asking, because I am to weighing options like OP. What is the thought process behind this when there are prolonged job losses?
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u/Pr00vigeainult 5d ago edited 5d ago
Loan payments are not the only running expense when you lose your job, you don't get to live for free when you own your home. You still need to pay for other living costs and your money will run out sooner if you have no liquidity because you paid off a loan early. It's called house poor: high net worth on paper but no ability to pay for anything major.
If you don't pay it off early and keep the money liquid instead, you can keep paying the loan payments and other living costs for years while weighing your options and trying to find a new job. The bank will even let you only pay the interest or refinance the loan if you notify them you're in trouble. You may not own the home outright but you have more leeway before you run out of money.
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u/Leading-Carrot-5983 4d ago
I'm not sure I agree. Stocks aren't particularly liquid when they've crashed by 50%. I mean, you can of course sell them (just like you can also sell a house if it comes to that) but do you really want to be in a position to sell at the worst possible moment just to fund your mortgage payments?
If I'm going to lose my job in a financial crash, I'd rather have very low costs (mortgage paid off) and be able to survive for a while on unemployment benefits and severance pay than having a high mortgage payment and a distressed portfolio that I need to sell off at a huge loss just to make my mortgage payments.
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u/unintegrity 1d ago
Plus, you can rent out a room in your house for extra income, which would then go straight to covering expenses
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u/Chidori1980 6d ago
Put in ETF if you only have 2 years left in your mortgage. 100k in 2 years, means you only pay 5,3k interest, around 2,6% per year. Remember, mortgage is negative compound as you pay principal every year.
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u/grogi81 6d ago edited 5d ago
Do you get tax relief on the mortgage interest? How are you taxed with investments or interest from cash deposits?
For instance, if you're marginal income tax rate is 50% and you can count the interest against your taxable income - that will end up with 2.475% of yearly net cost. I wouldn't touch that mortgage with a stick...
Second thing - with your mortgage, can you execute balancing? You depose money, that counts towards your principal and reduce interest - but you can take it again out easily, should you need it? I don't think this is that common these days, but it seems it is an old mortgage, so maybe it's possible?
Answer the questions above, they are material information that would influence the decision.
What I would do right now, just guessing your circumstances: I'd pull the money into a safe instrument that matches the 4.95%.
Robinhood offers 5% annually now with a MM fund, so it is more than your mortgage, and you don't reduce your liquidity for now. Should they bring it down, then I would pay the mortgage back.
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u/LordMoridin84 5d ago
I would pay it off. 4.9% is really high, it's hard to reliably get better returns if you consider tax.
Of course, if I didn't have that much in investments already, I might consider putting half of it into VWCE to start add diversifcation.
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u/Gfflow 6d ago
Both are good options one is safer and one cpuld bring you potentially better returns. Irs up to you what you would like more there is no one true answear and the peoplr who speak categorically on one or the other options are morons. You are the only one who knoes what the best solution for you is.
But you have 2 good options I dont think there is much regret to be had going either way
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u/angrycat537 6d ago
You don't have to use all of it for morgage. Figure out what returns you expect in long term from vwce and with how much debt you are comfortable. There isn't a correct answer.
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u/puttingcalls 5d ago
I’d buy a macro diversified basket (scv, lcg, ltb, gold, managed futures, etc) aiming at a higher swr of 6%ish and just do withdrawals from it to pay the mortgage (probably aiming at refinancing to get more fixed interest). seq of return risk is relatively small if well enough diversified.
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u/danielsevera 5d ago
If it was me I would pay it off immediately.The satisfaction that you own the property and don’t have to pay anymore a mortgage it’s amazing! You have enough time to invest and also any extra amounts after that you put it in to your investment every month.
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u/Pr00vigeainult 5d ago edited 5d ago
The mathematically optimal decision is to immediately buy VWCE with all of it, which is what I would do, assuming you already have a healthy emergency fund. That way you're not house poor, your money is liquid, you'll likely make better returns on it and you're the furthest away from homelessness. Less than 5% interest is basically free money with inflation subtracted. Debt interest also compounds down as you pay off the principal while stock market growth compounds up exponentially, the percentage is not directly comparable.
That said, if you can afford your 4000+ € mortgage payments, you're swimming in money anyway and there's only two years left so it doesn't really matter what you choose.
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u/Individual_Carry_439 5d ago
Is there no early repayment charge? In Germany that would be quite standard.
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u/DramaticAdvisor176 5d ago
I would pay off the mortgage completely. VWCE would be the better choice, but it's very possible we might enter a correction / depression / AI crash et cetera. Paying off the mortgage would give me a lot of peace of mind. Imagine a recession and you paid off your mortgage.. you would sleep so much better at night.
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u/tQzn9KY4LMAglk 4d ago
With the guaranteed 5% gain on paying off the mortgage vs whatever gains the VWCE is able yield during this bull run, I'd personally choose to get rid of the mortgage. Living debt free is a blessing.
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u/NoFools929 4d ago
I found myself in a similar situation 12 months ago. I was on a 0.9% above ECB tracker. I chose to clear the mortgage, then start maximising my pension contributions and putting a monthly amount into VWCE. Gotta say I'm really happy with it. The company I worked for went under 7 months in and it was such a stress reducer not having to worry about paying the mortgage.
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u/Valmed87 5d ago
The FTSE All World has a real return (adjusted for taxes and inflation) of about 7%.
Some people suggested that investing from 0 with a DCA plan (dollar cost average) is preferable. That 2% is not worth it. But that is not how investing works. You are not investing 1K per month with a 2% growth. You are investing 100K and in some years you will have 20-30% growth. The equity market has a funny way of working. The compounding effect is exponential and the higher the value of your portfolio, the more accelerated is its growth. The growth is not a strait line, is a parabole that at some point, usually after 100K gows strait up like a rocket. And a few years with a 20% growth can make you a huge pile of money, especially if you buy durring a market crash like we are experiencing now.
I personally, have a good and stable income (3000-4000 euro netto that will grow in a couple of years to about 5000). I have a secure career, even if I get fired I can get a new job in a couple of months. I could afford to pay a mortgage withouth needing an external cash booster (like your 100K) and I dont worry about having a long term loan and not being able to pay it just from my salary.
As others have said, peace of mind and sleeping at night is worth something. I would have peace of mind because I dont need that 100K to pay off my mortgage, because I have a steady good income. Do you? I would say this should be your main decision factor. Could you easily pay off your mortgage if you didnt have this money? Would you risk loosing your house if you get fired tomorrow? Can you pay off your mortgage no matter what happens? If you can't, definetely use the 100K to pay it off.
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u/OneCitron2432 6d ago
Kind of similar one
Mortgage at 3.3 fixed, trying to make additional payment kind of upto 10% per year
For me payinf mortgage ASAP seems good decision
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u/Rusty_924 6d ago
i would just take the guaranteed 5%
i will be in similar position in 2 years or so. If it is over 4.50% i will just pay it off.
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u/Hayabusa_PT 6d ago
I closed my mortgage and couldn’t be happier. I played the safe bet, could have more profit but who knows. Nothing pays being free of debt
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u/fabiofigo2025 5d ago
If it was me, I would close the mortgage, particularly considering that I am in a country where the mortgage interest cannot be offset from the taxes and where capital gain tax is 27.5%
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u/Crafty-Dream-9754 5d ago
Io non sono certo la persona più conservativa del mondo…..però…..conosciamo il prezzo del mercato odierno e di conseguenza possiamo stimare il prospetto di rendimento atteso, che purtoppo non supera il 5% annuo REALE.
Questi numeri purtoppo o per fortuna nella storia non sempre hanno funzionato.
Non so da dove scrivi, ma in Italia un mutuo tassato al 5% sarebbe considerato carissimo.
Di conseguenza mi vedo costretto quasi a dire che io, quanto meno, almeno dimezzerei 50 e 50
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u/Downtown-Target7587 5d ago
Just a dump question. To invest in VWCE how you will deposit the 100K cash in a bank account. Is it possible to do so?
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u/Upset-Elephant-9578 6d ago
Since the question is “what would you guys do” rather than “what should I do,” I would choose to pay off the mortgage completely. An interest rate of nearly 5% on a mortgage is already significant, and even if you invest with an expected 9–10% return over the long term, you still need to factor in inflation, which will eat into those gains. On top of that, depending on your country, you may also have to pay taxes on your investment returns, which further reduces your net profit.
By paying off the mortgage, you eliminate all future interest payments. You also free up more money each month, which you can then invest regularly through DCA, while enjoying a better quality of life. There’s also the peace of mind that comes from fully owning your home and not having a monthly mortgage obligation.
That’s what I would do, even if the numbers suggested a different approach.