Paying Extra on Our Mortgage

Today I am going to go to the bank. I’m paying extra on our mortgage. $2,726 to be exact, that’s 350,000 ISK in the local currency. By going to the bank I mean doing it at my computer, at work, during lunch. Here’s what it looks like.

Paying extra on our mortgage using our online bank
Paying extra on our mortgage using our online bank

It’s a bit less than we normally do. Our plan is to make regular monthly payments of $3,850 (500,000 ISK), and ideally we’d like to make payments of $5,000 (650,000 ISK). There are a couple of reasons why we are paying less than we would like to. The main reason is that I’m currently the only one working. Ben is doing some freelance here and there but his main job is to take care of Daníel, which is a full time job with freelance on top.

Another reason for is that we seem to keep getting hit with unexpected expenses almost every month, running 6 months now. This latest one is a huge hot water utility bill (yes, hot water is delivered to homes in Iceland and is used for heating and general warm water uses). We ourselves use hot water with care. I suspect it’s our tenant that’s blasting hot water through the radiator system. We made one big mistake when we rented out our guest house and that is we didn’t make utility payments a part of the monthly rent. In the future we will make sure that the utility expenses are included and reflect the guest house’s share of the total square area. This will encourage people to use resources more wisely. In any case it’s too late for the current tenant for now but you always learn.

Success! And poor English.
Success! And poor English.

Why pay down the mortgage?

Why are we paying extra on our mortgage rather than investing in stocks or putting our money in a savings account? There are several in our eyes excellent reasons for this. The number one is security. Investing in real estate is one of the few investments that survived the financial crisis in 2008. The whole stock market collapsed and I’m not just talking about it going down by several percentage points, I’m saying that most (if not all) of the companies listed there and all the funds traded there went bankrupt. We would have been back to square one.

The other reason is that we are living under capital controls. We can’t invest in foreign stock markets. I’m sorry but I can’t view the domestic stock exchange with less than 20 companies as diversified enough, let alone a safe retirement option. The grandmother of a friend of mine summed it up nicely the other day. She’s from a well off family and had several investments of various types: Of all my investments, only concrete has proven reliable (most houses are made of poured concrete here).

How can we pay so much extra?

How are we paying able to so much extra towards our principal every month? Its not an exact science. We didn’t decide one day that we were going to take such a large part of our salary aside and repay our mortgage with it. It started much smaller but snowballed along the way. We like to consider every large purchase we make an investment if at all possible. That’s one of the main reasons why we bought our house (it had a guest house we could rent out). Repaying the mortgage early is a good investment in our eyes. It saves us years of interest payments (remember that we can not get anything back from taxes here in Iceland) – and it reduces our inflation risk by a huge amount (remember as well that our mortgage is inflation linked).

Taken together, our decisions have caused us to have low monthly expenditures, but has steadily increased our monthly income.

The current tally

Whenever the last post is in a previous month I’ll include the repayment tally like the one below:

  • Assets: $459,446 
    • Real estate: $455,506 / 56,938,190 ISK
    • Cash Savings: $3,839 / 479,867 ISK
    • Stocks: $101 / 12,625 ISK
  • Debt: -$130,492 
    • Mortgage: -$130,460 / -16,307,456 ISK
    • Credit Cards: -$32 / -4,031 ISK

Sum: $328,954 (Up 1.5%)