Financial Statement – January

Savings rate = 45%

Total net worth increase = + 9,905 EUR

My increase in net worth is mostly due to an adjustment I made on my pension and not related to any “real” increase. I was very conservative about the amount of taxes I would pay if I decide to retrieve the cash from my pension account and I have adjusted that this month. This adjustment represents a 3,6k increase in my pension value.

I got a small salary increase and a small bonus. Unfortunately, the small bonus went almost entirely to pay for the adjustment of costs than landlords in Germany do on a yearly basis + some furniture we bought for baby #2, which will come at the end of March (very exciting!). So yes, even with a salary increase and a bonus, our savings rate was lower than usual.

Cash 11,500 +1,850
Net Cash flow Real Estate Business 3,200 +100
Pensions 96,730 +5,270
Security deposit for current house 2,000 -500
Rental Property #1 115,000 +0
Rental Property #2 120,000 +0
Debt (Bank) -9,520 +3,185
Total networth 338,910 +9,905

I am now 38% FI 🙂

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The hidden costs of a mortgage loan

I have recently been searching for apartments, not for the purpose of investing, but as a primary residence. I know, my house should not be seen as an asset and it is definitely not the smartest financial move I can do, however I do feel that I would be more emotionally comfortable if I buy my own apartment. Ultimately, you have to feel good about where you spend your money!

We currently own 2 small apartments which we rent short-term, we bought them relatively cheap and now we are checking the possibility of selling one of them, making a profit, and using that cash for our primary residence. As our primary residence would be a 3-bedroom apartment and in the capital city, we would still need extra cash to pay for it, which we currently do not have. And this is why we have decided to contact banks to understand how much would we pay for your mortgage. I am completely shocked and I have decided to share my concerns with you so that you can also be aware of all the costs you will face when asking for a mortgage.

First of all, there are taxes and costs related to the purchase of the house you have to take into account. If an apartment is advertised at 300k, do not forget you have to pay 300k + taxes + other costs. Depending on the country, normally you need to add at least 4% on the advertised price.

In terms of costs that you have to pay to the bank, there are a lot of small costs and the fact that banks do not generally merge all of those has a purpose, i.e., so that you do not clearly see how much exactly you have to pay. Be aware of:

  • Costs you have to pay at the beginning of the mortgage: depending on the country, those can include taxes on the mortgage (in Portugal you pay 0.8% on the value of the mortgage) + numerous small costs for formalising the deal, such as payment for evaluating the home and others. Those can easily increase the price of your home by 1% or 2%, which is relatively significant.
  • Interest rate: currently interest rates are very low which might be an incentive for people to buy real estate. Indeed, we were offered a 1% rate, which is quite low. However, even with a 1% interest rate, if we are considering a 300k loan, we would pay 65k of interest over the period of 40 years, i.e., an average of 135 Euros per month. In addition, in many countries, they do not offer you a fixed rate, but instead a spread on the Euribor. As the Euribor is currently around 0%, banks assume this will be the rate for the next 40 years when they provide you with the mortgage payment simulation. This is very misleading! Be aware that most likely interest rates will increase and, therefore, we would have to pay more than 65k.
  • Insurance: Because banks need to be protected in case you do not pay your mortgage, they generally request that you have both a home and life insurance. Normally they also have an insurance company in the group and they strongly recommend that you use their products. In our case, the costs of the insurances over a period of 40 years was almost 100k, i.e., almost 200 Euros monthly.

Even though this is all very country specific, I believe in general the rules are relatively similar in Europe. Of course the exact costs and %s will depend on the country, banks and your specific individual situation.

Summarising and just to give you an example with numbers, if you are buying a home of 300k, you will have to pay to the seller 312k. You will then have to pay the bank as initial costs around 3k, which makes the total initial cost of the property = 315k. If you are granted a 40 years’ loan, even with a low interest rate, you will pay 165k in total for both interest rates and other costs (mostly insurance). Total price of the apartment = 480k, 60% higher than the advertised costs of 300k.

Crazy, right?