Borrowing to Invest

B

BIG

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Has anyone used Property equity to invest in Funds and/or Stocks?
Presumably you could remortgage property to release cash to buy investment funds/stocks. Assuming you get say 4.5% borrowing rate and can get an average of 10% (gross) return from investment funds, this looks like a more profitable investment strategy than further inevesting in property at the moment.
Would banks facilitate this?
 
BIG said:
and can get an average of 10% (gross) return from investment funds
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Where does this 10% figure come from? Is it net of all charges and taxes? What if such returns don't transpire or, worse still, the investment value falls and you still have to service the debt used to finance it?
Would banks facilitate this?
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Some banks will allow you to do a mortgage topup and spend the money on whatever you like. But borrowing to invest is normally a high risk strategy and you should check that it is the most appropriate strategy for your specific situation. I'd imagine that there are few situations in which it is the most prudent thing to do. The AAM guide to savings & investments has a bit on this in case that helps.
 
BIG said:
Has anyone used Property equity to invest in Funds and/or Stocks?
Presumably you could remortgage property to release cash to buy investment funds/stocks.
Click to expand...

If you want to take a geared position in stocks & shares, it's probably simpler to use spread bets or CFDs. Whether it's actually a good idea in principle to do so, you'll have to judge for yourself . . .
 
The main drawback of geared investments is that there is the possibility of losing not only your own money but also somebody else's!

One thing to note - if you borrow on your mortgage to invest then you cannot claim owner occupier mortgage interest relief on the interest on the topup. You mention 4.5% as the rate paid on the borrowings but that seems very optimistic these days with ECB = 3.75% and probably rising imminently.
 

10% p.a is a realistic return if you do your homework on a few a big blue chip companies.

Would you agree that this strategy involves no more risk that buying investment property seeing that stocks have always outperformed property over the long term?
 

The big differences are investment property generally produces rental income which can be used to service the costs of borrowing, and those interest costs can be offset against the rental income for tax purposes.

Equity investments may or may not produce dividend income depending on the particular shares, but interest charges on loans taken out to invest in shares cannot be offset against the dividend income for tax purposes.
 
BIG said:
Would you agree that this strategy involves no more risk that buying investment property seeing that stocks have always outperformed property over the long term?
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If you can comfortably service the debt on the loan it would be far more prudent to invest that same amount in a low-cost passive index tracker. That way should your circumstances change you can easily alter the amount you invest and you are not reducing your potential return with borrowing costs (even if 'dollar cost averaging' does historically underperform "buy and hold").
 
BIG said:
10% p.a is a realistic return if you do your homework on a few a big blue chip companies.
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10% p.a. capital growth? While past performance is no guide to future returns what companies have been giving such returns regularly over recent years?
 
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