Borrowing to increase contributions

[Deleted User]

Bemma wrote: »

My DC pot is invested in what ever I choose it to be invested in! So in this case I would choose cash. No leveraging against stocks and bonds. I would be at the mercy of inflation with this cash... but I'm talking about 1 or 2 years, so don't see that an issue.

In that case it’s a simple exercise in comparing the cost of servicing the debt vs the benefits. And in proving your ability to take on a meaningful amount of debt at low rates. And reading the terms very carefully. For example, can the lender recall the debt at any time?

bowlhead99

Thrugelmir wrote: »

As for option 2. How many months are you proposing to take a £24k unsecured loan over? As the monthly repayments could be sizable even at "low cost" rate of interest. Though unlikely to be as low you imagine.

As an example, Tesco Bank's rate for £24k over 5 years is 2.9%, £430 a month. If you take it over 7 years it would be a higher rate of 3.8% but lower monthly payments of £325. You might not mind the slightly higher rate if the tax relief is substantial and it allows you to pay back the principal more slowly. 7 years is about as long as you can go and £25k as high as you can go without the rate rising significantly.

No doubt there are other providers, just had Tesco in my mind as I used them for a similar sized loan a couple of years back and went for the longer 7 year term. This was in a year when I was funding a property deposit while also facing a marginal rate of tax of 60% (personal allowance withdrawn due to high earnings) and wanted to fund some VCT as well. If affordability is a risk, one can take a longer term loan rather than a shorter term one, and simply pay if off early to avoid the later years' interest. FWIW I don't plan to use the whole 7 years but have not paid it off or refinanced it as yet (as that would involve depleting my savings cushion or non-pension investments, or holding back from what I might like to make in further pension contributions this year).

As an aside, I have a barclaycard offer at the moment on an existing longstanding card, which is 1.9% fee to transfer to an existing card or even a money transfer to my current account at 0% until Apr 2021. A oneoff 1.9% to have no interest charges on most of the money (i.e. the money other than the minimum repayments) for 18 months is pretty cheap. I may use this for a few thousand pounds of work I want done on my home.

Most 'money saving experts' would say to use savings or investments for the home improvements and that it's bad to have a habit of using any form of borrowings to feed instant gratification feelgood projects. Or if you are going to borrow cheaply on a cc, use it to pay down the existing and more expensive loan, not buy stuff, you idiot. However, the flexibility from using someone else's finance is useful.

Effectively I am using borrowings to maintain a decent 'emergency fund' and investments (including pension investments with masses of tax relief). There is an interest cost, to pay for that flexibility. My income and savings would support paying it off faster and avoiding the interest. But if there was a serious problem with my income (e.g. a few months without a job, during which time I could not get new credit), it would be convenient that I had planned ahead and could pay the borrowings off out of savings gradually over time as the monthly payments came due, while using some of the 'financed' savings for living expenses.

People look at risk differently and if I had a lower level of income and assets I would probably not be looking to risk stretching things by taking on debt to obtain tax relief.

For example, if the income tax relief was only at basic rate, then avoiding 20% tax now and paying 15% in retirement (20% less TFLS) is not a huge 'rate of return' and the investments really need to perform to cover the interest cost, and you can't guarantee they will perform when you are only looking at a relatively low timescale, and increased outgoings may be unwelcome if household finances are already borderline 'tight'. Whereas in my case, avoiding 60% tax a couple of years ago and paying 15% in retirement instead is something that can justify a lot of finance charges for the borrowing, as long as you can service the borrowing without having practical cashflow issues and running into trouble.

The above is not a recommendation, I am just talking around the subject as OP wanted to 'stimulate a conversation'.

I would tend to agree with Mordko and Maxi and Mally etc - if you have fully considered all the different risks after reading all the terms carefully, and believe you have enough certainty that you aren't creating big potential problems for yourself; it is a simple case of considering whether the finance cost is 'worth' the benefits. Of tax relief, of investment or interest returns, of having a cash buffer on hand... whatever advantages you hope your 'stooze' will deliver.

MaxiRobriguez

Deleted_User wrote: »

Surely all the money you put into your DC pension goes into stocks and bonds.

You can keep it in a cash fund if you so wish.

[Deleted User]

MaxiRobriguez wrote: »

You can keep it in a cash fund if you so wish.

Usually a bad idea. In this particular scenario it’s ok if a safe loan can be secured but the overall gain is going to be very small.

MaxiRobriguez

Deleted_User wrote: »

Usually a bad idea. In this particular scenario it’s ok if a safe loan can be secured but the overall gain is going to be very small.

A bad idea for long term investment sure, but a stooze when coming up to retirement could be 40% gains for a few years compared to taking as salary to pay for living expenses.

Thrugelmir

bowlhead99 wrote: »

As an example, Tesco Bank's rate for £24k over 5 years is 2.9%, £430 a month. If you take it over 7 years it would be a higher rate of 3.8% but lower monthly payments of £325.

Rates advertised more often differ to those actually obtained. Read the small print and Tesco's state.

The rate we will offer you is based on your loan requirements and individual circumstances. The minimum rate we offer is 2.9% APR and the maximum rate is 34.5% APR.

My comments are made generically. As peoples circumstances are markedly different. One size doesn't fit all. Of course there's always someone for whom something has worked extremely well.