bank loan to invest in stock

themanfromamarillo

Basic question, if your investment tanks and ends up worthless where are you going to get £15,700 from to pay off the loan in 3 years time?

grey_gym_sock

this doesn't make sense, because the loan needs to be repaid over 3 years. it can only make sense with a much longer-term loan.

suppose you take out £15,000 loan, with 3.3% interest, and invest it in shares which have a dividend yield of 4% ... can't you pay the interest using the dividends? yes, but it's a repayment loan, and you can't make the repayments using just the dividends:

4% dividends on £15,000 is £600 per year, so say £50 per month (you may actually get them quarterly, but that's unimportant).

how much do you pay per month on a 3.3% 3-year repayment loan of £15,000? ... £438 (according this calculator - http://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator - it says "mortgage calculator", but the maths is the same).

so in month 1, you'd have £50 dividends and have to sell £388-worth of shares - which you only bought 1 month ago - this is complete madness, as they could have plunged in value - you're supposed to stick with shares for at least 5 years, and preferably 10 years.

and you'd have to keep selling every month. if they start by falling in value, you would have sold the lot long before the loan repayments are finished.

you can borrow over the long-term to invest in shares. this is what you are doing if you have a mortgage and also invest in shares. a mortgage, e.g. of 25 years, is long enough to do this.

(and as others have said, 100% in shares is not low-risk, even using a tracker.)

jimjames

thegentleway wrote: »

I thought trackers were low risk? Ignoring loan (interest over 3 years is only £763.68), what's the risk of investing £15k in an index fund?

Do you realise what a tracker actually is?

It's a fund that tracks an index. That index can be anything and can vary from completely different levels of risk although I'm not sure any pure equity tracker would be low risk. So a tracker as a product doesn't have a risk associated with it as such, the underlying index is what determines the risk.

An emerging markets tracker is not the same risk as a gilts tracker