How much of a mortgage did you take out?

Apparently, a simple question. We have our money. We will subtract the purchase expenses from it, and the remaining gap needed to close the deal will be taken as a mortgage. For example, if we want to buy an apartment for two million shekels, and we have 800,000 shekels, we will deduct 150,000 shekels in purchase expenses from our capital and take a mortgage of 2,000,000 minus 650,000 (our capital minus purchase expenses). This results in a mortgage of 1,350,000 shekels.

The first challenge is that many people do not accurately calculate the purchase expenses on the one hand, and the ability to cope for years with a mortgage of 1,350,000, as in the example above. This is not what I want to talk about this time. To avoid mistakes at this critical stage, do not forgo quality financial advice. Even before searching for an apartment, To find an apartment within your budget.

How not to make a decision?

Let's say I found an apartment worth 2,000,000 shekels and I have 2,200,000 shekels in liquid assets or more. Should I take out a mortgage? If you ask those around you or on the internet, you'll get different answers depending on the respondent's worldview. For example: "Take out a mortgage, it's the cheapest loan." Or on the other hand: "Don't take out a mortgage, why be beholden to the bank?"

Although the two answers are contradictory in their conclusions, both are very bad answers. If taking a loan is not suitable for my financial goals, then I won't take a loan/mortgage just because I found one at a cheap price. The same applies if I find a cheap supplier of cigarettes or cocaine; I won't start using either of them. Consuming something because it's cheap and not because you need it is a bad practice when it comes to a mortgage or any other product that isn't required by my plan and won't advance me.

The second answer, "Don't be a slave to the bank," is also a bad answer. Someone who answers this feels burdened every month when the mortgage payment is debited from their account, feels "enslaved," and out of their desire for this enslavement to end, they advise others not to take out a mortgage. One of the things we shouldn't do before making financial decisions is to add emotional weight. Beyond need On our decision. I absolutely suggest considering the emotional aspect of every decision. Ultimately, our happiness is something worth preserving and developing, and we won't want to do things that will harm it. The point is that happiness or the harm to happiness for different people is created by different factors. For one, a million shekels in debt to the bank is a sleepless burden, and for another, it's insignificant. The monthly payment doesn't bother him, and the very fact of him being in debt doesn't trouble him at all. When we listen to advice based on emotion Streams We might make a decision based on the emotional system of those strangers, which could be very different from ours, and in doing so, we might be hurt twice: we'll gain less financial capital, which is important to us, and we'll be less happy because we acted according to principles of happiness. of others. In short, everyone is "addicted" to different things, and different things bother them. I assume you wouldn't take advice like "don't get addicted to foreign vacations or dining out." We understand that we'll miss out on something with vacations and entertainment, but we also clearly understand the return, assuming we made informed decisions (for example, not going on a vacation we couldn't afford with our own money, even with interest-free loans).

Should I take out a mortgage when I don't have to?

As mentioned, according to the example, I have the ability to take out a mortgage of 1,350,000 shekels, but I am not obligated to take out this mortgage. Even if a mortgage pressures me, I can choose two ways: to take it despite the pressure, or not to take it. As mentioned, I am not among those who think the emotional system is inferior and decisions should only be made rationally. My wife may think differently from me in light of the shirt she once bought me, but I am truly trying to combine both.

But, and this is very important, to combine emotion with rationality, one must hold data on both. To know the The price tag of every decision. Let’s say we believe that a mortgage will negatively impact our quality of life in some way. Would we be missing out on anything if we didn’t take one out? Suppose the 1,350,000 shekels in question are currently in the capital market, yielding an average return of 7.1%, while I’ll pay 5.1% interest on the mortgage. "Rational" but superficial people will look at the data and say, "The return on the investment exceeds the loan interest, so it’s worth taking out a mortgage to preserve the investment." On the other hand, someone will come along and say, "I don’t want to be enslaved," or "The mortgage worries me." In most cases, the discussion will remain at this level of hand-waving because most people lack the ability to quantify the financial benefit of taking out a mortgage, and therefore don’t know how "worthwhile" their concerns are. A discussion based on mere hand-waving is dangerous if we make a decision alone, because we might make a bad decision, and it is dozens of times more dangerous when we make a joint decision as a couple, with each side looking at things from their own perspective. The wife says, "If we don’t take out a mortgage, we’ll miss out on the potential for a "big profit,’” and her partner says, “I don’t want to be enslaved.” This is a decision based on data from completely different perspectives, so any compromise one side makes will inevitably leave the other side almost entirely dissatisfied—even if they decide, say, to take half of the possible mortgage amount.

I propose a different approach: regardless of what's decided, it's worth doing so when one can quantify the future consequences of the decision. For example, taking out a mortgage of 1,350,000 for twenty years would result in a monthly payment of approximately 8,900 shekels. What if we don't take the mortgage but invest that 8,900 shekels every month instead? What will be the difference in our capital in 20 years? The answer is 700,000 shekels. Or in 30 years, 1.8 million. Are you willing to be indebted for 700,000 or 1.8 million? Some are, and some are not. There is no good or bad decision because everyone has different goals. What's important is that the decision contributes to achieving your goal. Want to calculate it yourself?

Enter data into the calculator below, which I am very proud of, that you think is more suitable for you:

A calculator, as a calculator, ultimately provides a numerical answer. The weakness of a numerical answer is our difficulty in feeling it physically, and therefore we often attach insufficient importance to it. We invite you to see In the previous article, I did my best to address this human weakness.

In a side note, when the Association of Mortgage Consultants was established, there was a debate about what to call the organization. I was on the side that supported "Housing Finance Consultants" and not Mortgage Consultants. This is indeed the name chosen for the organization, but life has more power than official decisions, and thus the name Mortgage Consultants became established. I still think Housing Finance Consultants is a better name because, as mentioned, sometimes the purpose of the consultation is to show that, according to the family's values, desires, and goals, it is better not to take out a mortgage at all.