Behind Golden Bars

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avatar of @tarazkp
@tarazkp4 months ago
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5 min read

Throughout the "Covid years", a huge amount of people bought homes and drove up the prices. While this wasn't the case with my own purchase of a house, it was finalized in February 2021 and we moved on the weekend lockdowns began around Easter, so perhaps it is counted into the mix. For us though and in Finland in general, prices of housing didn't skyrocket as they did in other areas, but still and against the judgement of friends, I ensured that we collared our mortgage at what was a very low rate. Those that advised us however said it would be a waste of money, since rates are so low, so we will be paying a premium for nothing.


For those who bought during the pandemic in for example Australia, they were buying the houses at a premium that might have been 40-50 percent above where they were valued a year or so earlier, but they could justify this because of the exceptionally low rates. However, fast-forward a few years and things might have changed and those who didn't collar might be getting a little bit nervous or like in Australia, outright panicking at the rapid climb in interest rates that are heavily affecting their repayments.

And, while some people did indeed lock their loans, supposedly there are 800,000 mortgage locks set to expire this year. This means that all of these households are going to be slugged with largely inflated repayments and what this does, is take that same amount away from purchasing power for other things. The estimation is that it is going to be up to 20B a year missing from the economy, that is going toward mortgage repayments, which means into the bank pockets. And this of course isn't the whole story, since once people stop spending, the economy declines too.

Because of the interest rate rises that are looking to control the inflation, the value of properties are decreasing rapidly from the highs and will likely continue to do so, meaning that the asset value doesn't cover the debt liability, putting new owners in difficult positions. Even if they wanted to sell and recoup their costs, they couldn't, because they would still be facing a shortfall and therefore still have a debt to cover. This is likely going to be a stressful time for many.

I was thinking about this from a personal level knowing that even with the collar, my wife and I are not completely insulated from the rising costs, where for example, our energy costs have ballooned and the general inflation on cost of living has eaten heavily into our currently stagnant salaries.

What would be the value of the peace of mind of not having a mortgage?

This is something I am contemplating now, just in case at some point there is an opportunity to pay off the mortgage with for example, a very large crypto pump, or do something else. Because, there are options.

Currently we have (due to a bank error that saw us with no collar, a fight and then reinstatement of the collar), about eight years left on our mortgage collar. this means that for the next eight years or so, the future is pretty predictable in terms of our repayments. They would increase slightly, but not too much. This is peace of mind, but it is time-limited and at some point, that collar ends.

However, given a lumpsum (for this exercise it will be considered now) that could pay off the mortgage, doesn't mean paying off the mortgage is the best course of action. Instead, it might be better to buy something else that would work as a value generating asset to cover the mortgage - like an investment property to rent out. If instead of paying the mortgage we were to buy an apartment (possibly two smaller ones) outright to rent, it should give us an income that would cover our mortgage for now and once the collar is removed, cover the excess it might increase, if we haven't found a way to pay it off through those years.

Yet, because we would be effectively covering our mortgage with the rent, we would also be able to more quickly paydown by continuing making repayments with our salaries while it is collared and doubling our monthly contributions. This will cut our loan period in almost half and that would mean that at the end of the collar, we wouldn't have too many years left until it was ours outright, and we would also have the rental properties that are generating income on the side. This would be ideal.

While there is value in having this outcome in terms of peace of mind for the future, there is also the opportunity cost of doing this, where for example, if using investment funds in crypto to cover the purchases, that reduction in holdings will not benefit from further increases. If it is the top of the market when selling, this is okay, as it means being able to pull out, purchase and then start rebuying with fiat savings as the prices fall again. However, if it isn't the top and it is sold early, the difference might be quite large, making "peace of mind" expensive, which could be the difference between buying for example, one, two or three investment properties.

Certainty is something we all crave, even when we know it is an illusion. But the next best thing is to have some level of confidence in actions, where there is a predictability of outcome. Having a mortgage paid off is great, but it isn't the be all and end all of financial wellbeing, as there are still costs to be covered. Having a generative asset like rental properties can have more value than the held debt, because it means being able to have a predictable income to cover costs, as well as an asset to sell if under too much economic stress.

Ultimately for me, I still subscribe to the school of thought that multiple income sources are better than the chance at a large single source, even though currently I am not in that position at all. If my crypto portfolio does well, it should be okay, but I would like to have a bit more diversity at some point. But, ownership is the goal, where there is property I can hold, whether it be in the physical world like a house, or the digital world like an NFT, or token stake such as HIVE.

A lot of people bought their "dream house" but find themselves in a financial nightmare, because they have felt confident in their ability to predict the future with certainty, but they haven't factored in the likelihood of conditions like interest rates changing. So far, they haven't even moved significantly, but due to the way people have spent and their debt ratio, they are suffering still. What happens if it doubles again from here?


Hopefully people will find ways to survive through this, but I also think that a lot of people are going to suffer heavily and even when things recover, still be suffering due to the decisions of the past. It is great to live in the now, but the favorable conditions of the now today, can quickly turn into the calamity of the now tomorrow. Especially from an economic sense.

Taraz [ Gen1: Hive ]

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