In April I wrote a post about our loans – Debt: The Good, The Bad and The Ugly. I looked at our three loans (a mortgage, a home equity loan and a commercial loan) and concluded that it made sense to use part of the proceeds of the sale of my company to pay off our home equity loan (which we had taken out to buy a boat) while retaining the other two loans.
The reasoning behind that decision was that the home equity loan had a higher rate of interest (which was not tax-deductible) and had been taken out to acquire a depreciating asset, while the repayments represented a fair chunk of our annual expenses (just under 12%). Given the fact that some turbulence was expected in the markets at the time (I am talking about you, BREXIT!) and the positive impact that paying off the loan would have on our savings rate, it was clear that this loan had to go.
Writing the post helped me work through our options and once the decision was made, there was only one thing left to do – action it! It was a great feeling to log onto my online banking account a few weeks later and see the loan balance at zero. Another important milestone in our FI journey.
Once the mission was accomplished we no longer had monthly repayments to make on this loan so our monthly savings rate jumped from 34% to 40%. Cash started to accumulate in our savings account so I started looking into how best to use it. And this is where logic went out the window and instinct took over. Much as I realise that investing the money in an ETF or stock is likely to give me a higher return than the interest we are currently paying on our mortgage, the truth is that it feels really good to get rid of debt.
So I put my calculations and trusty Excel spreadsheet aside and decided to go for the feel-good factor, channelling our money towards paying off the mortgage instead of investments. I started to make aggressive repayments each month – 40% of our salaries went straight into paying off the mortgage.
Four months later I have to say that I have no regrets. I look at our dwindling mortgage balance and get as much satisfaction as I do when our investments increase in value. I intend to keep this up until I pay off our mortgage in full, which should happen around February 2017 – five months from now.
Getting rid of our monthly mortgage payment will increase our savings rate to 44%. So the question is, what then?
We will be left with our final loan – a commercial loan we took out to finance the development of an office block that is currently rented out. The rent we receive for the property covers the repayments so this loan is not a drain on our income – although of course this could change if our tenant leaves and we do not find someone else to rent the property. One of the options on the table would be to make some extra payments to build a buffer that would enable us to ask the bank for a moratorium should we be between tenants. I like this idea because it would give me peace of mind that our cash flow would be protected in between rentals.
A second option would be to put the money aside to build a “war chest” for future investments in the property market. We are getting a good return on our commercial rental property so investing in another one is an interesting idea – especially if we save enough money to do so without needing to take on another loan. Once rented out the second property would become a positive revenue stream since there would be no monthly repayments to contend with.
The third option is of course investing the money on the markets. As I wrote in a previous post we have set up two portfolios over the last few months. One is made up of a mix of stocks and bonds, while the other is made up of ETFs. I will be monitoring progress and comparing results over the coming months so come next February I will have more information on which to base my decision.
As things stand, however, my preferred way forward would be to:
- Pay off the mortgage (half way there! another 5 months to go)
- Make 3 to 6 months’ worth of accelerated payments on the commercial loan to build a safety buffer
- Save aggressively to finance the development of a new office block
- Use the rent from the new office block to make accelerated payments on the first office block, thus paying off the commercial loan as fast as possible.
This is what I am planning for the time being – however this is not to say that my plans will not change by February, so watch this space!