Borrowing to invest.

Broken_Biscuits

have you looked into "stoozing" ?

i have to admit that i have never done this, but it looks like a lower risk version of what you are suggesting (interest free) and so may appeal?

https://forums.moneysavingexpert.com/discussion/4895882

TheTracker

A significant portion of people invest rather than paying down debt, which is logically little different from borrowing to invest. I don't pay down my 1.79% mortgage because I feel my surplus cash is better used elsewhere while that rate persists. Of course the rates are different but that just changes the benefit point rather than the concept.

paramaniac1

Zippeh wrote: »

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?

The stock market has a historical return of 8% per annum so you would be right to borrow. However, that is if you invest the money yourself in an index. Remember that 95% of the so-called expert fund managers that invest your money for you can't beat the index. The reason people still invest in these funds is that fund managers are able to convince ordinary people that they are too dim to invest it themselves and only they are clever enough to invest it on your behalf. Few people make money in the stock market even though it is relatively simple. Take apple. You do not need to be a Harvard educated mathematician to recognize that this company s**ts money. £10,000 in apple in 2010 would be worth approx. £45,000 today. The real job of the experts is to extract money out of your pocket and place it in theirs by scaring you with stories about risk and volatility and ordinary investors losing their shirts. This brainwashing can be tested by asking anyone you know whether they would invest in the stock market. I guarantee the first response will be along the lines of "what? and lose all my money?" This is music to the ears of the experts because they can continue to rob you blind. If you want to be a bolder and hopefully make a higher return than 8% then buy Under Armour, Stratasys, IPG Photonics, Splunk and Apple with your money, wait 10 years and in the mean time don't read or watch any financial news, just sit and wait and don't interfere and you'll make a good profit.

masonic

paramaniac1 wrote: »

The stock market has a historical return of 8% per annum so you would be right to borrow.

Which stock market investments will return 8% per annum over the next 5 years? Which stock market investments are guaranteed not to lose money over the next 5 years?

redux

I think a case could be made for borrowing 10 or 20%, but 100% is stretching it a lot.

Try making savings on your overall spending, and use that to invest. After all, if you did take out a loan the repayments would have to come from that sort of area.

Chickereeeee

TakeCareOfThePennies wrote: »

You cannot be serious.

Investing IS NEVER something you do with someone else's money. Unless you work in the financial services industry and are an IFA or Stockbroker.

Unless you call it a BTL mortgage...

C

Zippeh

redux wrote: »

I think a case could be made for borrowing 10 or 20%, but 100% is stretching it a lot.

Try making savings on your overall spending, and use that to invest. After all, if you did take out a loan the repayments would have to come from that sort of area.

The money to pay it back is already covered in what I would be paying into pension already and on top of that I save about £1000 a month. Its not a question of it being covered really, its more about whether or not the returns would cover the interest paid and if putting a large lump in one go is better than drip feeding.

racing_blue

My view: each £ of income can either be used to repay debt or to buy more stuff.

All borrowers have that choice - repay or invest- and I suspect the decision often hinges on personality traits and tolerance of uncertainty.

Many people are risk averse, yet borrow to the hilt when they buy their first house (their total borrowing may exceed their net assets by a factor of x5 to x10). Unsurprisingly, this doesn't always sit well and I suspect this is why we have hundred of "mortgage free wannabe" type posts on this site. For these people, repaying may be so obvious that they cannot imagine any other approach.

I started off as a repayer. But after thinking, I realised that I could *probably* do better by buying stuff which I hoped would appreciate in value, or provide an income stream.

redbuzzard

paramaniac1 wrote: »

The stock market has a historical return of 8% per annum so you would be right to borrow. However, that is if you invest the money yourself in an index. Remember that 95% of the so-called expert fund managers that invest your money for you can't beat the index. ...

Few people make money in the stock market even though it is relatively simple. ...

If you want to be a bolder and hopefully make a higher return than 8% then buy Under Armour, Stratasys, IPG Photonics, Splunk and Apple with your money, wait 10 years and in the mean time don't read or watch any financial news, just sit and wait and don't interfere and you'll make a good profit.

Bit of a contradiction there. Experts can't beat the index, but you are picking shares and suggesting we invest in those rather than a tracker.

And while you may be well aware of the difference, to imply that an assumption of a nailed on 8% from an equity tracker can be treated in the same way as the interest rate on a deposit account is a dangerous idea to plant in the minds of what the industry calls unsophisticated investors.

bowlhead99

paramaniac1 wrote: »

The stock market has a historical return of 8% per annum so you would be right to borrow. However, that is if you invest the money yourself in an index. Remember that 95% of the so-called expert fund managers that invest your money for you can't beat the index.

Of course if the goal when investing borrowed money is not to 'beat the index' but 'return more than the 3.7% borrowing rate', you would probably not want to borrow to invest money in an index which could drop 40% in value over the time period of your borrowing. There are other types of funds that focus on specific strategies or goals and may give a better result than an index. Easily investible indexes don't exist for all strategies, markets or asset classes.

Of course, the long term returns of the market are what you are looking at with pensions, and the loan would be repaid out of income rather than needing to cash in the investment to pay off the loan; hence if you know you can afford the monthly cashflow, borrowing at a known rate to fund something that should achieve a greater long term rate is not necessarily a bad thing. In the short term it is a gamble because you can't know whether the return from buying your pension assets at today's price and paying a borrowing fee will be better than buying it at the average of the next 60 months' prices. You hope it will be, but it might not be.

You might feel for example that although certain indexes average 8% over the long term averaged over all buy prices, we are not at a point in the economic cycle where returns would average 8% from current buy prices, maybe some lower return should be assumed for the next decade. Investment judgements are personal.

Take apple. You do not need to be a Harvard educated mathematician to recognize that this company s**ts money.

If you want to be a bolder and hopefully make a higher return than 8% then buy Under Armour, Stratasys, IPG Photonics, Splunk and Apple with your money, wait 10 years and in the mean time don't read or watch any financial news, just sit and wait and don't interfere and you'll make a good profit.

I would suggest that if Apple s**ts money and the market believes is will continue to s**t money for the next decade, then that is why people are willing to pay 0.7 trillion dollars for it. It is not necessarily the case that it will be worth more than a trillion dollars in a decade. It may only be worth half a trillion dollars when we see the actual results, or it might have gone bust. Such is the problem investing in consumer electronics firms.

Similarly, everyone is aware of the level of sales and projected growth and existing and expected branding endorsements given by major sports stars to UA, which will help drive those sales if they can continue to sign more of them. That is why it already costs $18-20bn to buy and not $18-20m. Investing on some tips and then closing your eyes to the financial news that comes across your desk is pretty dumb, even if a new poster on MSE says they are a screaming buy that he would happily invest blindfolded.

--
Anyway back to the question from the OP.

If you can afford to pay back the borrowing while meeting your own commitments, and are happy to gamble that the return is higher than the borrowing cost for the next few years it is probably OK - everyone has their own level of comfort. Obviously the levels of this new loan will restrict credit for other things you might want or need or consider more important than the pension but you will be unable to access the pension funds for the next 20+ years. If you are looking to buy a house for example, having £11k in your pension is all very well but does not help your 'affordability': the £200pm commitment might restrict what mortgage you could get.

Looking to borrow to make pension contributions at the beginning of a tax year is perhaps unusual. I have considered it myself at the end of a tax year.

This is because if you are on a 40% or 45% or 60% effective marginal tax rate which will drop to 20% or 40% the following year, but you don't have cash on hand, then grabbing a nice big slice of tax relief, funded out of the following year's earnings when the same level of tax relief is not available, is well worth it.

So, I'd quite happily borrow a few grand, get the high level of tax relief and pay back the loan in the next year or two at the very most - low interest cost and great result from timing pension contributions. The extra tax relief is better than the interest cost. However, if your tax relief rate is likely to be fixed, that advantage goes away and you are only getting normal tax relief which is always available. So there is no hurry, and looking to pay a whole five years of interest on some of this borrowed money seems like it is quite costly if the markets don't perform as you want.

I don't know where you sit, tax-bracket-wise. But feasibly, if you aspire to grow your salary or can move jobs, get a bonus etc, you may go into a higher tax bracket in the next 5 years. Borrowing now to access (e.g.) 20% tax relief now when you could have put in the money later out of normal earnings and taken (e.g.) 40% tax relief then, is definitely a waste of money.