Exploiting cheap loans?

JohnRo

CLAPTON wrote: »

re-read my first post

You're obviously very pleased with it, please show me the high yield bond fund you're talking about that has lost 50% of it's capital value and never recovered.

Shimrod

JohnRo wrote: »

You're obviously very pleased with it, please show me the high yield bond fund you're talking about that has lost 50% of it's capital value and never recovered.

What Clapton says makes a lot of sense. We're going through a bond bubble at the moment, so bond prices are only likely to go down in the future. The problem is nobody knows when.

To chase the yields you would need to cover off the 5.5% interest on the loan, you are going to have to go for higher risk bonds - which means you could end up losing capital as well as the income.

The one other person you think 'has a clue' is in fact getting leveraging mixed up with arbitrage.

CLAPTON

JohnRo wrote: »

You're obviously very pleased with it, please show me the high yield bond fund you're talking about that has lost 50% of it's capital value and never recovered.

tell me when the bank rate was last 0.5% and what happened to bond yields and prices when it went up to more historically levels like say 5%

JohnRo

Shimrod wrote: »

The one other person you think 'has a clue' is in fact getting leveraging mixed up with arbitrage.

Yes, accepted. I'm not pig headed about it but that's clearly being lost in translation.

alexanderalexander

Effectively lots of people borrow to invest (although few do so as directly as the OP suggests), so in principle this is not a barking mad idea by any means!

For example, I am currently drip-feeding spare money into equity investment trusts in preference to either overpaying my mortgage or paying off my credit cards which have many months left to run on 0% deals. This means I am effectively borrowing to invest.

There are various issues though, aside from the obvious risk: borrowing at 5.5% seems quite a high rate which will diminish/remove any potential gain. If you have a good credit rating, then consider getting 0% credit card deals for slow stoozing and super balance transfers, to be followed by ordinary balance transfers. Also consider mortgage borrowing (if you own a house) as that's cheaper. Additionally, I would agree that you should probably go for an investment area with more upside potential than bonds at the moment. I would also suggest that you drip feed the money in.

JohnRo

alexanderalexander wrote: »

If you have a good credit rating, then consider getting 0% credit card deals for slow stoozing and super balance transfers, to be followed by ordinary balance transfers.

Already doing so but had my last 0% CC application turned down for some bizarre reason, so I've kicked that into touch for now as repeated applications can themselves create a bad record as I understand it.

That's also why I mentioned possibly not being able to get a loan anyway if something has thrown a spanner in the works, but whatever it was, the lack of ability to pay what I owe wasn't it.

Jegersmart

Shimrod wrote: »

The one other person you think 'has a clue' is in fact getting leveraging mixed up with arbitrage.

Haha - yes there is an arb there as well, but learn something new today:

"In finance, leverage (sometimes referred to as gearing in the United Kingdom, or solvency in Australia) is a general term for any technique to multiply gains and losses.[1] Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives.[2]"

http://en.wikipedia.org/wiki/Leverage_(finance)

J

JohnRo

borrow £10,000 (simple round number)
monthly payments £190.84
total amount payable £11,449.96

deposit £10,000 @ 2% (net) interest over 5 years
less £190.84 monthly loan repayments
total return -£981.17 at end of year 5

That leaves me looking for an investment return at some point during that 5 year term of £981.17 to break even.

Just using my own money would require a return of over £1000 to effectively break even.

The attraction for me is that borrowing money and keeping my own on deposit means I'm exposed to any potential deposit account interest rate hikes in the next five years as well as being invested.

I personally don't see this as a big ask, a risk yes of course, but I accept that.

puzzledinvestor

If you tell the lender you're planning to put the loan amount in a deposit, instead of 15000 they may lend you a few million, especially if the deposit is also with them.

An investment with an expected total return of -£981.17 sounds great indeed.

anselld

JohnRo wrote: »

That leaves me looking for an investment return at some point during that 5 year term of £981.17 to break even.

... but you can't invest and leave on deposit.