It’s official! We have signed the contract on our first rental property. There are still some administration to be done, but during the middle of September we will already have the keys. It took quite a few months to get to this stage, but we are here. In the next few posts I will share our experience that might be useful for other fellow investors who are also planning to invest in the Dutch property market. The first article will be about financing.
As already mentioned in an earlier post, getting an investment mortgage in the Netherlands is not an easy task. We were quite lucky that we could use the fast property price increase of our area in our favor.
In June we have valuated our own house with an authorized company and they have put a EUR 420k price tag on it. This was great, as we could get an extra mortgage on our house of nearly EUR 100k.
Why is it good to have a mortgage on our own home and not on the rental property? Well, the interest rate. We could get an annuity mortgage for 30 years for only 2.33% and the rate is fixed for 10 years. There is no penalty on early repayment, so I am planning to pay back at least the large majority of it within 10 years anyway. Interest on the extra mortgage (as the purpose is not to use it on our main residence) is not deductible.
There is one disadvantage though. Currently our outstanding mortgage on our house is below 85% of the property value, which means lower interest. By getting an extra mortgage, the interest rate of our current mortgage will be increased by 0.5%, until we go below 85% again.
This effect, plus the new mortgage will increase our monthly mortgage payment by around EUR 455 per month. On a 30 years, EUR 100k mortgage, this would be equal to more like a 3.6% interest.
Nevertheless this is only a temporary effect. Once our outstanding mortgage falls under 85% of the property value again, the interest on both the original and the new mortgage will be reduced by 0.5%. From there onward, the extra mortgage payment per month vs today will be only around EUR 200 (and it includes principal)!
There are two ways of getting the outstanding mortgage below 85%:
- Property price increase
- Mortgage repayment
We obviously have no much impact on the first point, so the solution is quite obvious:
And this is exactly what we are going to do. In the first period we will aggressively pay against the mortgage. Not only the extra money that the rental will (hopefully) generate, but also the majority of our monthly savings.
According to my calculation, this would make us to be under 85% again within 2 years. This is a conservative calculation that does not take much property value increase into consideration. Of course if the house price appreciation in our area continues, this can happen even faster.
Going under 85% again is not only beneficial because of the lower interest rates (one again we are talking about below 2% rates), but also psychologically. I really don’t want to find ourselves in a situation when both property and stock prices start to fall (2007-2009 anybody…?) and we need to pay extra money to the bank by selling depreciating stocks, just in order to avoid being underwater. Reducing our liability to a reasonable level will be the number one priority. Once we are there, I see no point of paying off further due to the low interest rate. Instead, I will focus again on dividend investing.
All together we found this type of financing option as the most beneficial for us. If you don’t have your own house, or your outstanding mortgage is close to the property value, this might not be an option for you. Should you be in such situation, it still does not mean that you have to give it up, as there are still a few other options out there.
In the next article I will explain our selection criteria that has led to the property that we have finally chosen. Stay tuned!
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Disclaimer: This post or any other information on the site is not intended to be and does not constitute financial advice or any other advice. I am solely sharing my idea, plan and progress on financial independence and early retirement.