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What to do: pay off the credit or invest for passive income?

Pay off the credit or invest for passive income?

I saved a certain amount of money and I manage to keep saving month by month, what do I do? Do I pay off my credit or invest to generate higher income in the future?

Probably many of you have at least one mortgage loan and/or one or more consumer loans (if you read this article) and at the same time you have started to accumulate some financial reserves and may have thought or even started to put the money to work. In this context, you may also think about the fact that interest rates may rise, a crisis may occur at any time and at the same time you can see the good profits that have been made and are made from real estate investments, stock exchange, cryptocurrencies and business.

In all this context, it is normal for the answer to the question to pay the credit or invest the money to be complex, with many variables and uncertainties, but also so important. Basically the answer can guide your financial strategy for several years.

Let’s begin!

Before I should ask myself if I pay the credit or invest, there are some things we have to check:

  • If there are debts from credit cards and overdrafts with interest rates above 15% -20%, those should be paid before we think about investments;
  • Consumer debt, car etc. – we should focus on them and pay them in advance before investing;
  • We fail to save constantly – focus first on building this habit;
  • Reserve fund to cover living costs for a period of 6-12 months.

Before you have all the above checked, you should not even think about starting investing.

Any consumer credit used for the acquisition of liabilities should be paid as a priority. Real estate and investment loans (those used to purchase assets) are the ones we can doubt whether we will pay them in advance or not.

We will talk specifically about real estate loans, to simplify and make the analysis relevant, but we can have the same analysis process in the case of a non-real estate investment loan.Well, now the question that remains is: Do I pay the real estate loan or do I use my future reserves and savings for investments?

Economically speaking

From an economic point of view, we will compare the actual effective interest rate of the loan with the expected net return on investments.

For example, we have an interest of 5% on the mortgage loan and

a  return estimated by us of 10% of the investment in shares (historical average yield)

or

we find an apartment at a very good price and with a rent yield of 8%

or

bonds with 9% interest

and so on….

So we have on one hand a 5% safe interest vs. a yield estimate of 10% or 8% or 9%.The decision may seem obvious – at such a yield differential, in 20-25 years you pay the property 2 times.

But the decision is simple just at first sight and it becomes more complex when we go deep. Why? Because the interest rate on credit is safe (if it is 5%, it is 5% no matter what I do) while the return on investments is always an estimate.

Estimate because:

  • The stock market may no longer perform in the next 10 years as in the past or you catch a very weak interval;
  • The yield on the rental property may decrease, or it may not be at all, unless you have a tenant or you find a structural problem of the construction;
  • The issuer of the bond can go bankrupt and you lose all the money.

There are risks that you must take into account to adjust the returns on investments with the percentage of risk. Professionals always calculate their adjusted return on an investment. The calculation is very complex and has many variables. But for the sake of simplification we can estimate a differential for the degree of risk. For example: -1.5% for a very good real estate, -2.5% for small and medium-sized companies bonds and -3% for blue chips shares.Thus, we now have a comparison between + 5% credit payment and (10% – 3% = 7%) for shares; (8% -1.5% = 6.5%) for real estate and (9% -2.5% = 6.5%) for bonds.

Now it’s a little clearer. We know that up to a loan interest rate of 6.5% or 7% we can invest without problems, but if the interest exceeds these levels it becomes more profitable to pay the credit.

Of course, the calculation is relevant depending on how well we made our estimate of future profits.

Many investors and business owners maintain their long-term loans, knowing that they can generate higher long-term returns with the same amount of money. This is the case of many smaller or larger entrepreneurs, it is the case of those who invest professionally or even those who invest passively in the long term.

Obviously, a solution would be to make more risky and / or more active investments that can bring higher returns, but in this case you really should know what you are doing.

Important is to make your calculations as well as you can, because, after all, nobody knows the future.

Psychologically

The need for survival/safety is lower (and stronger) on Maslow’s pyramid than aspirational needs. From here comes a degree of stress that will make you quite conservative in investments when you have unpaid loans.

Emotions are not good in investments.

To make a decision:

  • Do your calculations – see economic analysis above;
  • Calculate your risk profile;
  • What decision would make you unable to sleep at night?;
  • How would you feel about paying off your debts? But what if you didn’t pay them?
  • How would you feel if you invested in passive income? But what if you didn’t invest?
  • How would you feel if you paid your credit with 5% interest and the stock would have a 50% yield that year, which you would not benefit from? But if you did not pay your credit and invest in the stock market, and the stock market would fall by 50% that year? Which of these 2 options would most disturb you?

When choosing whether to pay your credit or invest/accumulate reserves you must take into account both the economical and psychological aspects. Both are important, but more important are the psychological ones, because they have the power to sabotage you.

Finally, if you are still not cleared how to proceed, you can choose the middle way and use the amounts saved according to the formula: Invest = (10 – Credit interest rate) and with the rest pay the credit. That is, if the credit interest is 4% and you save 1000 EUR per month, you pay in advance (or you set aside to pay in advance) 400 EUR and you invest 600 EUR.

Simple, right?

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New investment project in Latvia announced by Bulkestate – Marijas Street

Bulkestate logo

Bulkestate announced today that it is preparing to launch a new investment project in Latvia: Marijas Street.

Bulkestate: Marijas Street

Bulkestate: Marijas Street

Launch time: Friday/ 17 May 2019 / 13:00 (EEST)

The object is located in the very centre of Riga and is one of the local cultural monuments.

Investment opportunity

Interest rate: 17% (+2%*)
Investment target: 1 750 000 EUR
Loan period: 9 months
Loan to value: 62%
Security: 1st rank mortgage

*Bulkestate incentive payment

For this project Bulkestate offers the following special incentive pay for investors:

  • Investors making EUR 10,000 or larger investment will receive 1% incentive payment from the invested amount, while
  • Investors making EUR 25,000 or larger investment will receive 2% incentive payment from the invested amount.
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New investment project in Latvia announced by Bulkestate – Saraiķi

Bulkestate logo

Bulkestate announced today that it is preparing to launch a new investment project in Latvia: Saraiķi.

Bulkestate: Saraiķi

Bulkestate: Saraiķi

Launch time: Wednesday/ 27 February 2019 / 15:00 (EEST)

Investment opportunity

Interest rate: 14%
Investment target: 34 000 EUR
Loan period: 12 months
Loan to value: 45%
Security: Mortgage
Repayment date: 06.03.2020

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New investment project in Latvia announced by Bulkestate – Luku Street – 2nd Stage

Bulkestate logo

Bulkestate announced today that it is preparing to launch a new investment project in Latvia: Lūku Street – 2nd Stage.

Launch time: Monday/ 14 January 2019 / 12:00 (EEST)

Lūku Street

Bulkestate: Lūku Street

Investment object

The mortgaged property is a 2200 m2 large land plot on Lūku Street, in Mārupe district.

Mārupe is one of the closest private housing areas to Riga. The main advantage of the region is the convenient traffic to the city centre, international airport and the seaside, at the same time preserving the green neighbourhood characteristic of the outskirts of the city.

Loan target

The borrower intends to refinance an existing loan to increase the operating capital of the borrower’s company.

Investment opportunity

Interest rate: 12%
Investment target: 32 275 EUR
Loan period: 6 months
Loan to value: 45%
Security: Mortgage

 

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New investment project in Latvia announced by Bulkestate – Blaumana Street – Launch 14 december 2018

Bulkestate logo

Bulkestate announced today that it is preparing to launch a new investment project in Latvia: Blaumana Street.

Launch time: 14 December 2018 / 13:00 (EEST)

Bulkestate incentive payment


For this project Bulkestate offers the following special incentive pay (cash-back) for investors by sharing part of its fee received from the client:

  • Investors making EUR 10,000 or larger investment will receive 1% incentive payment from the invested amount, while
  • Investors making EUR 25,000 or larger investment will receive 2% incentive payment from the invested amount.
Interest rate: 15% (+2%)

Investment target: 386,400 EUR
Loan period: 6 months
Loan to value: 77%
Security: Mortgage

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New investment project in Latvia announced by Bulkestate – Apartment in “Sun Terraces” – Launch 16 october 2018

Bulkestate logo

Bulkestate announced today that it is preparing to launch a new investment project in Latvia.

Launch time: Tuesday / 16 October 2018 / 17:00 (EEST)

Project information:

Interest rate: 16%
Investment target: 270,000 EUR
Loan period: 12 months
Loan to value: 70%
Security: Mortgage
For this project Bulkestate offers the following special incentive pay (cash-back) for investors by sharing part of its fee received from the client:

  • Investors making EUR 10,000 or larger investment will receive 1% incentive payment from the invested amount, while
  • Investors making EUR 25,000 or larger investment will receive 2% incentive payment from the invested amount.
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New investment project in Latvia announced by Bulkestate – Launch 6 july 2018

Bulkestate logo

Bulkestate announced today that it is preparing to launch a new investment project in Latvia.

Launch time: Tomorrow / 6 July 2018 / 16:00 (EEST)

The property is a 2200 m2 large land plot on Lūku Street, in Mārupe district. The land plot is intended for private house construction. Mārupe is one of the closest private housing areas to Riga.

Interest rate: 13%

Investment target: 35,000 EUR
Loan period: 6 months
Loan to value: 49%
Security: Mortgage

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A look into EstateGuru’s loan portfolio – June 2018

EstateGuru New Logo

Since the beginning of EstateGuru, already 367 projects with a total sum of €60 094 383 have been funded on the platform. All these projects have been done in 5 countries: Estonia, Latvia, Lithuania, Finland and Spain. In the following blog article, we give an overview of the EstateGuru loan portfolio in a short and informative analysis.

The EstateGuru loan portfolio is mostly divided into 3 types of loans: bridge loans, development loans and business loans. Bridge loans are defined as short-term real estate loans that provide the property owner the necessary capital until a permanent solution for financing has become available. A development loan is used to develop the property, that ranges from construction works to excavation works, i.e. development of area infrastructure, including utilities and roads. A business loan is a mortgage loan that is used to finance the capital needs of a company’s expansion, secured with a collateral that the company owns.

EstateGuru - outstanding loan portfolio by loan type

EstateGuru – outstanding loan portfolio by loan type (%)

Over a half of EstateGuru’s outstanding loan portfolio are bridge loans, with nearly a quarter of business loans and a bit over 1/4 of development loans. This shows the popularity of bridge loans to finance the capital needs of real estate developers and entrepreneurs.

Now let’s take a closer look at EstateGuru’s outstanding loan portfolio by country

EstateGuru - loan portfolio by country

EstateGuru – loan portfolio by country (%)

Since EstateGuru started its journey in Estonia and only later expanded to other countries, it might not come as a surprise that the highest amount of loans had been funded in Estonia. The country is currently enjoying an economic boom, which ensures that a lot of property developers are using the opportunity to get financing on good terms. 77% of EstateGuru’s whole loan portfolio has been done in Estonia, with Lithuania trailing at 11% and Latvia coming third at 9%. In 2018, EstateGuru also expanded to Finland and Spain, with the first projects on both respective markets already funded.

EstateGuru - loan portfolio by loan status

EstateGuru – loan portfolio by loan status (%)

Already 148 loans of 367 have been repaid on the EstateGuru platform as of today with a total principal returned amount of €23.7 million. This makes up about 36% of the whole portfolio. 2 loans with a combined sum of €360 000 are currently listed as “defaulted” with the sales processes of the collaterals ongoing. 1 defaulted project was recovered and investors gained a 13,72% return from this project.

EstateGuru offers secured loans

All of the projects on the EstateGuru platform are backed by a collateral. This ensures that in case a borrower is not able to repay his loan, then EstateGuru is able to take steps to make sure that the investors still receive their money. The main security against this is ensuring that the loan has a 1st or 2nd rank mortgage attached to it.

EstateGuru - loan portfolio security types

EstateGuru – loan portfolio security types (%)

As seen on the graph, a majority of the projects on EstateGuru are secured with a 1st rank mortgage as only 7% of the whole portfolio is secured with a 2nd rank mortgage. This means that in most cases, EstateGuru has all the rights to the underlying collateral.

Furthermore, all of the collaterals are either commercial real estate, residential real estate or land, which leaves the liquidity of the collaterals at a high level. This can be proved further on the following graph.

EstateGuru - loan portfolio collateral types

EstateGuru – loan portfolio collateral types (%)

61% of the projects on the platform are secured by residential real estate – be it a private house or apartments. A quarter of all loans are secured by a land plot and 14% are secured by commercial real estate like office spaces or a warehouse.

In conclusion, EstateGuru’s loan portfolio is already over €60 million and growing every day. The average return for investors today is 12.32%. In 2018 they are looking to open up even more investing opportunities for the investors by expanding into new countries and increasing the number of projects in the Baltics as well.

Source: EstateGuru.co

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The Ultimate Guide to your mortgage

Mortgages. The word itself comes from the French ‘Mort-gage’, which literally translates to ‘death-pledge’. On a lighter note, having a mortgage has for many decades been viewed as the first step into the adult world for many people as you move away from your family home or rented accommodation. While a mortgage is not for everyone (especially those who relocate often or have other commitments), financially it is indeed a fantastic way to reap the rewards of capital growth over time and create a nest egg to leave to your relatives in the future.

So other than finally being able to turn your basement into a miniature bar or build that greenhouse you’ve always wanted, there are a few things you should know to make sure you’re not paying any more than you need to and what to expect over the long-term.

Applying for a mortgage

If you’re reading this, you might not even have a mortgage yet and you’re thinking about how you can get started. While there are several new alternative finance platforms cropping up who offer residential mortgages, it’s highly like that most people will still go to their local bank (for now). Trying to break through the jargon and ancient systems used by the banks can make applying for a mortgage feel like trying to solve a Rubik’s Cube. To get started, try using a comparison site to filter a few potential mortgage providers for you. Enter your income and expenses details as well as the price of the property and your deposit, then most should show you an indication of what interest rate and product you can expect to get.

After that, you can either fill out an application online or set up an appointment either via video link, phone or face to face if there is anything you are unsure about. This is most likely going to be the biggest financial commitment of your life, so make sure you take the time to understand the financial provider you will be using to help you with it.

Repayment type

In general, one of the first things a bank will ask you when applying for a mortgage is what type of repayment option you want. Huh? Don’t worry, in general there are only two separate options that you need to know about:

  1. Principal and interest (Repayment) – Each month you pay the principal that you borrowed on the property plus the interest that the bank charges, at the end of your loan term you own the property outright with no extra payments due.
  2. Interest only – Each month you only pay the interest that the bank charges (Meaning you have a significantly lower monthly payment than you would on a principal and interest repayment basis), the whole principal amount is due at the end of the loan term. Overall, you will pay significantly more interest over the loan term with this option.

Over the past couple of decades, a lot of people using the interest only repayment option have got in to financial difficulty at the end of their schedule and ultimately had their home repossessed by the bank. A lot of banks and financial regulators are now imposing much stricter regulations for people who request an interest only repayment due to this. In contrast, it can be an extremely lucrative option for people buying a property to rent it out.

Mortgage Term

Another important thing you need to decide is how long you are going to take out your mortgage for, known as the ‘mortgage term’. 10 years? 20 years? 40 years? The answer really depends on you and your personal and financial circumstances.

If you’re expecting a few life events over the next 5 years, such as getting married or having children, then you might consider extending the mortgage term to keep your monthly repayments lower. Or maybe you are in the middle of a training induction period at work and you know you are going to receive a considerable pay rise in the next 12 months (Lucky you!), in this case you might choose a lower mortgage term with higher monthly repayments.

Bear in mind, the length of your mortgage term has a significant impact on how much interest you will pay overall.

Product

Possibly the most crucial aspect of your mortgage is the product that you choose. In general, this can be separated in to two types of products; fixed rate and variable rate.

  1. Fixed – Your monthly repayment will remain the same for an agreed period of time, for example, 2 or 5 years. This can be very useful for budgeting and for the risk-averse person who does not want to take any chances with rising interest rates.
  2. Variable – A variable rate can change on a monthly basis, either in line with the banks own rate, EURIBOR or the rates issued by your national bank. You may benefit from lower rates especially in a booming economic environment, however it can be harder to budget on a monthly basis.

The length of time you can have one of the products for completely depends on your bank, ranging from 1 year to a lifetime product offered by some providers.

If you’re thinking you don’t have either of these products, you may be on the standard default option product issued by your bank. This is usually the rate you roll on to after your fixed or variable rate ends (and if you don’t arrange a new one), it is usually much higher than the other products available and most people see their payment increase once and completely forget about it. If this sounds familiar, check with your bank immediately because you have the potential to save yourself €100’s per month!

Overpayment

One of the most valuable tips we can give you is to make the occasional overpayment on your mortgage, it has the potential to save you a colossal amount of interest over the term of your mortgage. Money Saving Expert has a fantastic overpayment calculator you can use to test the impact of making an overpayment, we’ll add an example below for you.

Let’s say you have a mortgage of €100,000 on a repayment basis with a 35 year term at 3.5% interest. Each month, you give the bank €413 which pays back the principal and interest. Let’s also say that from your investment portfolio, you are generating a very realistic minimum figure of €100 per month in interest for yourself. You then decide to put this €100 to use and make a regular overpayment each month on your mortgage, this is what happens:

  • Overpaying would save you €25,594 in interest alone
  • You will pay off your mortgage in full 10 years and 11 months earlier than originally planned

Wow! For some, that means retiring from work over a decade earlier and having a nice amount of savings each month to spend on whatever you want. Go ahead, test it yourself and play around with the figures.

Remember, this is all realistically possible by generating a cash flow from your investments and setting yourself a goal.

Now you know

Hopefully this guide will be of use to anyone who has a mortgage or is looking to get one in the near future, make sure to read over these points a few times and take it all in, it could save you €€€’s.

Source: www.bondora.com

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