Borrowing on my house to invest - am I crazy?

stevemanser

I bought a house in 1990 and it's value has quadrupled over the past 15 years. I am paying around 5% interest on the mortgage, and during that time the stock market has risen at around 14% each year. Has anyone ever re-mortgaged to release equity and then used that money to invest in shares or a GEB (Guaranteed Equity Bond - see Martin Lewis's info here )? What are the pitfalls?

kenshaz

Well,if you want to gamble with borrowed money,I realise that it is profit,but if you want to buy another house you will need that profit,because all houses have gone up in value.If you had a crystal ball and you good pick winning equities,great,how about putting the profit into property.

stevemanser

Well it's not really gambling if you choose a decent fund or a GEP (see Martin Lewis's info, on GEPs) - and I'm not buying another house. But this is not the reason it can't work, there must be another reason because otherwise EVERYONE would be doing it. Just think, you release £100,000 equity which you pay back at around 5% to your mortgage lender, and then you invest it over 5 years with a return of around 14% - or even if it makes only 10% it's still a nice little earner. How come nobody is doing it?

YorkshireBoy

I wouldn't 'gamble' with the equity in my house, but my immediate thoughts are...

• For a property value to have quadrupled over 15 years, the return required is around 9% year on year.
  
• Are you sure that the stock market has risen by (the equivalent of) 14% per year over the same period?
  
• One downside will be the £5K/year repayments on a 5% interest only £100K mortgage - more if repayment type taken. Can you meet this from income/salary, rather than cashing in the investments?
  
• Will the lender require a 'reason' for the equity release? What will you tell them?

jonesMUFCforever

The stock market has risen 14% in 2005 only.
Remember the late 90's after the tech bubble burst and the market fell 40%??
In this scenario you borrow £100k and find its worth only £60k in one year but you still owe Building society £100k plus having to pay at least the interest on the debt.
IMO very risky and it could lose you the very asset which is making you feel rich.

tomstickland

What you're doing is borrowing money at 5%, secured against the value of your house and then putting it somewhere where you hope it will grow at a faster rate. If run of the mill savings accounts were paying >5% then it'd be a guaranteed winner. Because most savings accounts don't pay that much then your option is riskier funds. They have no gaurantee of growth, and indeed lost money in the early 2000s.

You'd be better off getting an offset mortgage and borrowing the money from 0% credit cards to reduce your mortgage payments.

nearlyrich

ejones999 wrote:

The stock market has risen 14% in 2005 only.
Remember the late 90's after the tech bubble burst and the market fell 40%??
In this scenario you borrow £100k and find its worth only £60k in one year but you still owe Building society £100k plus having to pay at least the interest on the debt.
IMO very risky and it could lose you the very asset which is making you feel rich.

I agree, my ISA investments in equities have only increased in value over the last few months, I have seen £1500 dwindle to £900 in a couple of days in the techno crash, it's just about recovered. (In another fund)

I play the investment game with money I can afford to lose, the equity in my house is the cushion for my later years if I need to use it I will but I won't take too many chances on the stockmarket.

stevemanser

YorkshireBoy wrote:

[*]Will the lender require a 'reason' for the equity release? What will you tell them?[/list]

Yes, they probably wouldn't go for it unless it was for "home improvement" etc. One would have to lie.

System

I was 'gifted' my family home 3 years ago so it doesnt owe me a penny (technically), but i wouldnt gamble on it. If you do, i think your playing with fire!

YorkshireBoy

stevemanser wrote:

One would have to lie.

Then that would be classed as 'deception to gain a pecuniary advantage' - ie FRAUD.

Tim_L

Don't do anything without discussing with an IFA first.

There's a old and good rule that states that you should never borrow to invest. When this rule is broken, you are opening yourself up to serious risks if an investment fails.

Having said this, if you consider a similar situation where you have a chunk of cash and wish to know whether to invest it or pay off the mortgage, you might well conclude that there are ways of returning more than the cost of the mortgage - however if you were to do this you would need to ensure that the investment was not going to vanish on one bad day in the stock market, and also that it was liquid enough to be available quickly in case things went wrong. There's really very little difference between choosing to invest instead of paying off a mortgage and remortgaging to invest - the main thing is to ensure you don't overreach.

There are ways of investing without underlying capital via spreadbetting or trading on margins, but they're not for beginners and you have to know what you are doing and have funds to cover your position in case of a crash.

Let me also add that guaranteed equity bonds are without any shadow of a doubt the worst conceivable way of investing in the stockmarket. They have been discussed many times before, but broadly speaking they have the following deficiencies:

1) You can expect to get 5% a year on a cash deposit or low risk investment of the same size. Assuming a 5 year term this gives 25% growth. This means that although the capital is returned if there is a stock market fall over the term, you have a downside risk of 1/5 of the end value of your investment when placed in a low risk product. These investments are therefore not risk free though they are spun by the sellers to appear risk free.

2) You have no control over the timing of an exit from one of these products. If there is a massive rise in equity values this year and next, followed by falls, you can't easily lock in your gains after the rise.

3) You lose out on dividend income which is a fairly significant part of equity investment.

4) Gains are usually capped anyway, and there isn't a massive difference between the capped level and what you could get from lowish to medium risk investments.

Essentially a tracker will give you the same basic performance as these products with the advantage that you can bail out if things are going south. If you want returns, accept some risk and go for equity based investments. If you want safety, go for cash or low risk investments. You can't really have both.

GEBs are, in summary, quite awful investment products, and I have never understood why Martin lists them even with a disclaimer - they were one of his first moneysaving ideas listed on this site, and perhaps he's over attached to them. There are many other forms of investment that are less volatile than stocks and shares but tend to provide reasonable returns, and an IFA will be able to talk you through these.