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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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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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Eurocent continues servicing loans on Mintos peer-to-peer lending marketplace

Mintos logo

Here is an update on the situation with Eurocent-issued loans. After missing repayment of its corporate bonds on June 8, 2017, Eurocent has continued servicing the loans and passing on all borrower payments to investors on the Mintos marketplace. Since June 8, 2017, the outstanding investment portfolio in Eurocent loans on the Mintos marketplace has decreased by 21%.

Eurocent continues to negotiate with potential investors to resolve its financial situation. However, given the still-uncertain results of these negotiations, Eurocent has submitted an application to the court to restructure the company’s debts. This is a formal procedure that prevents creditors from commencing enforcement proceedings of the unpaid corporate bonds. The decision of the court is expected by September 2017.

If the court does not allow restructuring of the debt, Eurocent will enter bankruptcy procedure. To prepare for this scenario, Mintos has made an agreement with a third party that will take over servicing Eurocent-issued loans assigned to investors on the Mintos marketplace.

Given its financial situation, Eurocent has suspended the automatic buyback of loans that are late by more than 60 days. When automatic buyback was suspended through the technical side of the platform, the shield icon visually indicating the buyback guarantee was temporarily lost as a result. However, Eurocent still remains liable for the guarantee, as indicated in the respective loan assignment agreements, and the shield icon will re-appear for Eurocent loans after the next platform update.

Eurocent-issued loans that are delinquent continue to be serviced according to standard processing, and all repayments made on the loans by borrowers are paid back to investors on the Mintos marketplace. The company plans to fulfill its buyback liability as soon as its financial situation has improved.

If the company’s financial situation is not resolved and Eurocent enters bankruptcy procedure, investors with outstanding investment in delinquent loans that are not bought back will have a creditor claim against Eurocent.

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