Borrow to Invest?

ohmsoft

Hi

Now before you all scream "no, you total idiot - don't borrow to invest"! I understand, normally it's a complete no no but this may be a little different - although I'm still not sure....heres my circs.

I recently set up a save as you earn sharesave scheme in order to repay some existing debts at the end of three years - I'm paying in £250 a month and the current balance is £1750. Share prices have since gone up and while my option price is £4.00 they are now nearly £6.00.

Recently I have been forced to move out of my parents house and can no longer afford to pay into the share save unless I borrow. I can get a good loan rate of less than 6% and place the funds in an ISA to drip income to pay into sharesave (and the loan repayments - with some of my own funds) - I guess with the difference in rates I would loose 2% for the risk of the return on the shares.

However, it goes dead against what I been taught - carries at least some risk - and increases my total debt.

What do you guys think? Loan or Cancel the shares (or any other ideas)

Thanks for reading.

OMS

Astaroth

I assume your share save is a fairly standard affair where at the end of the 3 years you can either get your money back in full plus some fairly low interest or purchase the shares at the option price?

The "problem" is that as well as having the £250 a month going out your account for the sharesave scheme you are also going to have to have the money to repay the loan back at the same time.

I think you need to do your maths on this one to see how much you are going to have to borrow over what period so that there is sufficient funds for the sharesave and you can afford the £250+loan a month and then you can workout how much the financial risk is.

Once you have worked out the quantity of the risk you then have to decide what the odds are of the share price dropping below your option price.

ohmsoft

Cheers for the reply - yep correct in your assumption, if the shares drop below the option price the interest equates to less than 3% AER - and I guess that is a real risk.

I would probabally need to borrow £8K in total to pay for the shares and "discount" the loan repayment - at maturity the loan balance would be approx £5.5K - at current share price I would make a "profit" of about £6K - so the figures are in favour of the loan....but close.

If I've got my maths straight (which is very unlikely!!)

Astaroth

Playing with shares is always a risky game but with share save schemes you have the safety net of the 3% AER - though by paying for the scheme using a 6% loan you significantly reduce the safety net and technically reduce the potential to make profit as you will have the interest to pay back/ early redemption fee.

jonesMUFCforever

Is your saving in one plan or divided in to more than one (eg 5 yearly/ halfyearly plans of £50)?
If it is more than one consider ending early the one with the highest option price as this is the one with the least potential profit.
If your maths are correct then IMO it is not worth the risk.
The share price now you say is about £6 but there is no certainty in shares so it could be down back to £4 (or worse) when it comes to maturity.
Work out the loan against the worst case scenario of only getting your capital back with interest and see what you think.