Personal Finance

Personal Finance – Mortgages and risks for today

I found a great article about mortgages and what are the risks for the people taking mortgages today. Unfortunately, the post was in Finnish so here are the best parts the post and my personal tips in English

The mortgage risks can be divided in two. First one is insolvency risk and the second one is security risk.

freedomsearcher mortgage

Insolvency risk

Insolvency risk means a person who has not anymore money to payback the mortgage. The reason behind in most cases are unemployment or some else major change is your life which makes you not living up your means.

Another insolvency risk is low interest rates what we have had past 5 years. It is highly likely that these interest rates will rise in coming years. In Europe most of the mortgages are tied to Euribor rates which means the mortgages are not fixed to certain rates. Average mortgages is around (Euribor 12months + 1% (Bank Margin)) = -0,18 % + 1 % = 0,82% total. Yes, the Euribor interest is negative. I am quite sure when Euribor rises to around 4% this will have huge impact to people’s possibility to payback the mortgage and it will cause pressure to house pricing.It is expected that Euribor rates will increases a little bit over 1% for coming 1-2 years.

Security risk

Security risk a risk when for some reason value of the security decreases. In theory, in most cases you would have your house as a security for the mortgage and this means value of house decreases. It can happen because the interest rates raises or megatrends like urbanization or something else which decreases the demand of house you own.

So, how to prepare against this risk? Best way is to gather some money while you are working. Like always when talking about the savings or investing, this should happen automatically. Remember to pay yourself first! The recommendation is to keep enough money for 3-6 months expenses in bank account for special circumstances like this.

Hopefully this text makes you think a little bit and if you will take mortgage during this year, at least I would not take “all-in mortgage”. It means you don’t maximize your mortgage, but instead you leave some leverage for your side. It can be for example 100 or 200 dollars / euros what you invest in low cost index funds or ETF’s.

Additional tip here; if you are having already a mortgage, please remember ask new offers from banks yearly basis. For most of us, mortgage is second biggest expense after taxes, so even small things matter!

Btw. Happy New Year!

Regards,

Matt

Source: Inderes / Asuntovelka

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