Borrowing to invest is probably most commonly seen when people have a mortgage on a buy to let property, ie, they’ve borrowed from the bank/building society to invest in property for capital growth or rental income.
They win when the property increases in value or they receive high rental income returns.
They lose when the property prices drop and they’re in negative equity or the rental income doesn’t cover the mortgage payments. Consider how imminent interest rate increases will affect buy-to-let investors with big mortgages…
It’s a risky business that not all would want to get into as there are no guarantees but many do to reap the benefits.
But what about borrowing to invest in shares/equities?
Whilst there are tons of articles and info online about borrowing to invest in property, I couldn’t find anything recent about borrowing to invest in equities. Why is this? Too risky because markets can be volatile? Isn’t it still a form of leverage/gearing?
Or just a stupid idea that no one in their right mind should even consider? Ahem….
- I get a small fixed interest loan.
- I use the loan to purchase equities/funds via my SIPP.
- As a lower tax rate payer, I get 20% tax relief, which I will use to purchase more equities/funds in my SIPP.
- I pay back the loan over 3 or 5 years (ie 36 or 60 x fixed payments)
- Over the 3 / 5 years, my funds grow, including compound interest, time in the market and all that.
Ok, point 5 is the big ‘maybe’ – investments can go down as well as up. And granted that there’s more benefit if you’re a higher tax rate payer (40%+ tax relief) but perhaps still worth looking at?
As someone who invests making small regular monthly payments, this is also a chance to make a lump sum investment for a change, Monevator’s just made a timely post about lump sum investing here.
So, where to get a low, fixed interest loan?
A quick check at various banks (including my own bank) and I see that I could get a £7,000 loan, 4% APR for 5 years (rate is ‘representative’ so I might get that, or it could be higher, depending on my credit rating, I guess).
60 x £128.81 payments = total to pay £7,728.60
So the loan will cost me £728.60 over 5 years, or £145.72 per year.
20% tax relief via my SIPP on £7,000 works out at £1,750 so I’m up by £1,021.14
from the start.
My £7,000 + £1,750 will be invested in index trackers, ETFs or shares.
Am I missing something really obvious here, or is this too simple to work?
Apart from getting into debt and the big risk that whatever I use the loan to invest in may not see any gains, is this a viable idea?
If I were to invest money from my own pocket, wouldn’t there still be the same risk, ie my investment not performing? (Except of course, in the above example, if the £7,000 was from my own pocket, I would get the full £1,750 tax benefit, instead of just £1,021.84).
So if I invested in the wrong fund (or at the wrong time), I could lose money, regardless of whether the money was from a loan or not, although with the loan, I’ll have to pay £728.60 for the cost of borrowing.
Many of the blogs/websites I read these days talk about paying off debts/loans/mortgages so that you can becoming debt free and on the road to financially independence.
Here I am thinking about getting into debt but using the debt/loan to work for me. There’s no guarantee that fund/equity prices will grow but isn’t that just investment risk anyway?
Anyway, I’m just mulling over this – perhaps it’ll take an adjustment of the markets for me to make a move, so I’ll wait and see what happens.
Oh but wait, isn’t that trying to time the market…?