Exploiting cheap loans?

puzzledinvestor

JohnRo wrote: »

If I borrow to invest - that means I'm not touching my own money.

If I invest my own money the interest it would otherwise earn is lost at the point it is transferred to the investment.

That's not the right comparison.
If you borrow 15K at 5.5% and leave 15K of your money earning a 3.2% interest, you will lose money compared to not borrowing and just transferring your money to the same investment.

JohnRo

Jegersmart wrote: »

This is effectively leverage and when used in the right way can be useful. Risk management is key, and I think if you decide to go ahead with it then you need to really look at what you decide to invest in. I would go for something less risky than HYB's, I would probably go for an initial position in China equities (tracker or managed, your choice), some emerging Asia and something relating to natural resources. I say less risky, what I mean is that if a HYB has risen 50% in 5 years, it could easily do the reverse and if you look at China as an example it has taken a battering for the last 2+ years. I see less risk in China or Asian equities than I do in bonds that have been hugely inflated by money printing and low interest rates.

Yeah I'll need to give it some thought, at least one person on this thread has a clue.

jimjames

JohnRo wrote: »

Option one

just invest 15K of my money in said HYB and hope for a similar 50% over the next 5 years.

That is exactly the problem. The likelihood of a similar return from the same asset over the next 5 years is very low just like the disclaimer on every investment says.

If you are borrowing to invest I would put the money into something that has far more chance of exceeding your borrowing costs which I would put into equities not bonds. I've thought the same thing but in my case by using excess in my mortgage at 2.29% rather than a new loan.

You also need to consider if having an outstanding £15k loan could affect any other borrowing you might want to do over the next 5 years.

JohnRo

jimjames wrote: »

You also need to consider if having an outstanding £15k loan could affect any other borrowing you might want to do over the next 5 years.

Indeed, I have and at present I can't see it causing a problem. I have the cash to cover the loan so the only downside to consider is if for some reason I'd require even more borrowing which I can't see myself needing to do.

The only reason this has cropped up is that I can't see loans getting much cheaper, of course I could be wrong. That leaves the chances of inflationary pressure driving interest rates higher a much more likely scenario since the banking industry and government can't keep robbing savers and pensioners forever with artificially low rates.

YorkshireBoy

JohnRo wrote: »

I have the cash to cover the loan

Why not use your own money (then take a smaller loan to cover any shortfall at the end of your chosen investment period)? After all, it'll be cheaper than any (5 or more year) loan.

I believe it's termed 'putting your money where your mouth is'.

JohnRo

YorkshireBoy wrote: »

Why not use your own money (then take a smaller loan to cover any shortfall at the end of your chosen investment period)? After all, it'll be cheaper than any (5 or more year) loan.

I believe it's termed 'putting your money where your mouth is'.

I'm already putting my money where my mouth is, monthly.

This is about exploiting (relatively) cheap borrowing, the point being that if there is an opportunity then it needs to be grabbed with both hands.

The cost of borrowing is offset by an interest rate on the cash covering the loan. the loan invested is then required to produce the shortfall to break even or better to profit. In my opinion that isn't a huge risk right now.

somethingcorporate

What would you pay the loan back with? your cash? in which case why not just not get a loan and use your own money and then keep all the gains.

You still need to get a better overall return than the money you are borrowing and have the cash free to service the debt. I think this is a huge risk and would be far better if you just used your money.

Debt maybe relatively cheap at the moment but if you cannot beat the cost of borrowing it then you should not borrow it in the first place and using the past as a predictor of the future means you will be on a hiding to nothing as they say, what goes up must come down.

JohnRo

The past indicates a 50% return in the fund I've described, it isn't a government bond as some seem to be implying.

The requirement in this scenario is for an investment return in the region of 20% over 5 years, thats exaggerated and assumes deposit account interest rates don't rise in all that time. If they do the investment growth required is further reduced.

somethingcorporate

The thing is there is no guarantee of rates that high without risking capital over such a short period of time.

The only thing "safe" that may have got close was the NS&I savings certs as these were above inflation and tax free but have not been around in over a year now. Still, I don't think they'd beat the cost of the loan over 5 years unless rates went North quite quickly.

CLAPTON

JohnRo wrote: »

The past indicates a 50% return in the fund I've described, it isn't a government bond as some seem to be implying.

The requirement in this scenario is for an investment return in the region of 20% over 5 years, thats exaggerated and assumes deposit account interest rates don't rise in all that time. If they do the investment growth required is further reduced.

re-read my first post