Borrowing to invest.

Zippeh

I currently pay £200 a month net into my pension fund. If i borrowed £11000 over 5yrs at 3.7% then this equates to £200 a month. Would it be a horrendous idea to borrow the money and invest it, then put it straight into the pension then use what id be putting in every month to pay it off?

masonic

You would be gambling on stock markets going up in the short term. If they instead fell (or even went up by less than 3.7% a year), then you'd be worse off than if you kept paying into the pension as normal.

Zippeh

Yes thats true. But over five years is 3.7% achievable? I understand its a risk, but then theres a risk anyway. I suppose its the difference between putting a lump in one go or drip feeding isnt it.

kidmugsy

Zippeh wrote: »

Yes thats true. But over five years is 3.7% achievable? I understand its a risk, but then theres a risk anyway. I suppose its the difference between putting a lump in one go or drip feeding isnt it.

Go to the library and borrow The Great Crash by J K Galbraith.

Of course at the moment you could borrow at 3.7% p.a and put it into a current account paying 5% (4% after tax) or a regular saver paying 6% (if it matures in 16-17, then you'll presumably get the interest tax-free).

masonic

Zippeh wrote: »

Yes thats true. But over five years is 3.7% achievable? I understand its a risk, but then theres a risk anyway. I suppose its the difference between putting a lump in one go or drip feeding isnt it.

Over a period as short as 5 years, the probability of generating returns of >3.7% on say a 80:20 portfolio is going to be close to 50%.

It is a bit different from lump sum vs drip feeding, because in that case instead of having to generate a 3.7% return just to break even on the deal, you are looking just to beat the risk free rate of return (after tax), which is likely to be lower, putting the odds more in your favour.

tigerspill

Borrowing to invest can be a very dangerous strategy. Particularly if you are considering a short term period (<10 years).
The think to consider is what happens if you lose say half your investment, how would you cover your borrowing?

Zippeh

Id cover the borrowing by paying the same as im paying into my pension now. But i guess if i did lose half of it, then thered be nothing extra going into my pension in that time.

masonic

tigerspill wrote: »

Borrowing to invest can be a very dangerous strategy. Particularly if you are considering a short term period (<10 years).
The think to consider is what happens if you lose say half your investment, how would you cover your borrowing?

The money is being put into a pension, so it won't be possible to use it against the debt in any case. The OP is intending to pay off the loan from income. The risk in this situation is that if financial circumstances require it, the pension payments could be stopped, however, the loan payments could not.

redbuzzard

I assume you mean put the £11,000 net directly into a pension.

The other point is that you will get tax relief on your pension contribution. It will be topped up to £13,750 and if you have higher rate tax relief you could get up to another £2750 back as a tax rebate directly.

So you will end up with £13,750 in the pension at a net cost to you of somewhere between £9298 - £12048, including the loan interest of c. £1048.

However - I still wouldn't do it, assuming my tax status isn't going to change materially, and pension tax relief doesn't change (it might of course).

There's probably a bigger risk now than say 5 years ago to investing a lump in one go; and of course if you put your £200 a month into pension for five years you will still get the tax uplift, and if the market gets worse before it gets better you will have more units of whatever you have been buying by 2020.

Freecall

The Financial Services Industry had the same idea in the late 1970's and for the next decade or so did very well from it.

The idea was that you borrowed money against an asset (your house) and then instead of paying it back, they used your monthly payments to buy investment products in an Endowment Policy.

The idea was that after 25 years or so, your investments would be worth far more than the debt. The policy would pay off the debt and give some extra cash for good measure.

What could possibly go wrong?

:eek:

mad_rich

Over five years, you say?



Or how about eleven: