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Old 11.01.2017, 13:14
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The_Love_Doctor The_Love_Doctor is offline
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Re: Mortgage tips and risks

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Talking about tax savings, which option is better? If they have 300'000 and buy a flat worth 900'000:
  • put all 300'000 as capital and take 600'000 mortgage
  • put only 200'000 as capital and take 700'000 mortgage, keep 100'000 for emergencies
Case 3: Rent and make a decision with the 300k based on future personal needs, some of those decisions could be to invest for retirement or future generations and some might be just spent on personal development, house renovation, purchases etc (this is what you've been saving for after all!).

The right combination really depends on personal circumstances and personal goals, and most importantly someone qualified that could highlight things that you might not have thought about. It's not free advice but it's money well spent if the result is preventing you from turning a 300k saving pot into 150k black-hole.

Some of the things you are suggesting are referred to as "Picking up pennies in front of the steam roller" by Nassim Taleb (see: Taleb Distribution). In this case buying a house is picking up pennies i.e. savings on rent vs mortgage and the steam roller being the potential correction that may or may not happen.

The point here that someone buying a house is effectively underwriting a bubble burst insurance policy with the premium they receive being the savings they make from rent. I'm no underwriter but assume that a 30% correction happens on average once every 25 years, that's 4% chance of it happening. If you had to buy a policy to cover you for a house price correction of 30% on a 1 million house, the fair value for the premium would be 1 million x 0.3 x 0.04 = CHF12k annually, so every year you're saving 12k and sometime within the 25 years you lose 300k. It's fine if you can take the loss and you plan to stay in the property for a long period of time, but it's not fine if you're doing it just to save on the rent!

What has happened is the low interest rate environment has pushed retail investors with no real understanding / awareness of risk and consequences into buying houses, stocks, derivatives, ETFs, mutual funds etc when they normally wouldn't in a normal environment. This is what the central banks want but the consequences might not necessarily lead to the rosy stimulated full functioning economy, what they have done has pushed asset prices to bubble territory.

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