Cash vs. Mortgage & Investment in today´s market environment

03/12/2024

When the interest rates of the mortgages were at the level of 2% p.a. there were plenty of clients who took the mortgage even they did not need. Mostly the clients said that they can invest their own savings and get a significantly higher return than 2% so why they should use their own money for buying a property. This approach was very common, but how is it in the today´s market environment? Does it still make a sense?


Let´s imagine a mortgage of CZK 5,000,000 and that you have the same amount of money at your bank account. You can buy a property with no mortgage from your cash or you can get a mortgage of CZK 5,000,000 and you can invest your own CZK 5,000,000 on the financial markets. See some key figures below:


Mortgage:

  • If we consider the interest rate on the level of 4.89% which is very common these days and 5-year fixation, 30 years duration, then you will "overpay" CZK 1,174,583 on the interests (-)
  • However you can deduct the paid interests from the tax base - every year up to CZK 150,000 so you will get back CZK 22,500 per year which is CZK 112,500 in 5 years fixation period. (+)
  • We can also include the fees for getting a mortgage, e.g. for processing fee, evaluation or cadastre office of CZK 10,000 (-)
  • And of course that you need to have a sufficient cash-flow to cover the monthly payments.
  • In total the costs for such kind of mortgage on 5-year period is approx CZK 1,072,083.


Investment:

  • We consider you invest the full CZK 5,000,000 on the financial market with an average rate of return 7.50% p.a.
  • In 5 years your portfolio would reach the level of CZK 7,178,146.
  • It means that your profit for this 5-year period is CZK 2,178,146.
  • The investments might have tax exemption after 3-year holding period so there will be 0% income tax.


Summary:

  • Your mortgage cost CZK 1,072,083.
  • Your investment gained CZK 2,178,146.
  • In total you earned CZK 1,106,063 in 5 years!


You can see that this appoach could make sense even in today´s market environment. Of course that you should be aware of potential negatives such as a volatility of an investment, emotional side of paying the mortgage and / or potential drawdown of your investment.

This approach is rather for investment type of clients / investors, but as you can see it could make a sense from the financial point of view.

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