Buying a house when you have shares

[rayonline]

Just a hypothetical question. Shares, perhaps has a return rate of 10% PA not including dividends in the long term spread out. Mortgage has a interest borrow rate of around 6.5%. What is your advice to people who have some shares and is going to buy a house to live in? One could sell the shares and knock of the mortgage faster althou one could argue the return rate on shares an be higher. There is also risk involved with a mortgage if you prolong it ie if you get made redundant also if you knock off the house you can then put savings into shares and rebuild up again.

Your thoughts?

[dingoNZ]

Well it depends on your circumstances. If you have a 300k mortgage and paying 6.5% on it and only 30k of shares you'll be paying ~$17,000 in interest (assuming you are paying the principal off) where if you're earning 10% on the shares you will make $3,000.

I know some users here have revolving loans which they use to invests in the stock market for high dividend paying stocks as from my understanding it can be deducted for taxation purposes. I'm sure someone will explain in here

[Harvey Specter]

1. Sell shares,
2. buy house,
3. get a loan plus a separate unutilised revolving credit account (upto your full 80% LVR limit)
4. use revolving credit account exclusively for the purchase of shares and other income generating investments
= interest on that separate revolving credit account becomes tax deductible

* this post does not constitute tax advise. Please seek psychiatric help if you choose to rely on it.

[minimoke]

Couple of things at play here. Increase in value of capital, income and expenditure.

Unless you live in Christchurch or Auckland there may be limited opportunity for capital growth in a house - especially if you take in maintenance etc costs. Where as you would expect your share portfolio to increase in value.

Teh dividend yield will in some way go towards paying the interest on your mortgage. the money you would have paid in mortgage interest then goes into paying down debt for an immediate 10% return (10% less tax = 6.5% interest to be paid approx)

In the event of redundancy you will need access to cash. Either through a revolving mortgage facility. Or perhaps shares that can be immediately sold off.

[Aaron]

Have a look at Birmanboy’s thread under “Investment Strategy”> “Folly or Fortitude”. This is the same question asked in a different way.
A question I have pondered myself though many times. I can answer this better once I become the first ever person to be able to reliably predict the future. If you can guarantee a 10% (non-taxable) capital gain plus dividends it would be a no brainer. Keep the shares although you might want to look at how you might structure things to make the interest tax deductible. But there is no guaranteed 10% return. There is a guaranteed 6.5% saving on interest costs.
Debt equals risk.
My opinion would be that I have no idea for your situation as I don’t know much about the size of the loan your age etc etc. but I would tend to sell the shares and pay off the loan but keep the line of credit open and wait until an obvious bargain shows up. My personal (and so far incorrect) view is that the GFC2 is just around the corner and I will borrow against property to buy shares if they become a bargain, assuming I am intelligent/brave/lucky enough to recognise a bargain in a time of turmoil. Keep in mind I am poor, older and have a terrible track record of investing.

[Schrodinger]

Good advice in here. It depends on your situation.

One of my favourite excel models is the one for mortgage costs and it really opens your eyes when you stretch this to 30+ years. If you have sound performance investing outside of housing it will then entirely depend if you are married/single and maybe have the choice to live without a mortgage. Of course this will depend on the missus and her patience levels. You do not have to own a house and have a huge mortgage. Much more flexibility if you are single.

A simple observation is that paying the bank huge interest costs over 20+ years for a large asset that is by some estimates 30%+ overvalued is not a smart move. Other posters here have said put this on your RC facility and pay 6.5% which is more attractive than ML lending. You can run the various scenarios in an Excel model and compare what you potentially return over 20+ years. I recommend this as it can get your thinking straight.

A general observation is that the higher the quality the asset/investment the more impact this will have on your long term success. So focus on investing in things that are good companies/investments and you should be set for the future. Some investors on these forums are pulling 20%+ PA over more than 10 years so it definitely is achievable.

Just my 2c.

[Snoopy]

A general observation is that the higher the quality the asset/investment the more impact this will have on your long term success. So focus on investing in things that are good companies/investments and you should be set for the future. Some investors on these forums are pulling 20%+ PA over more than 10 years so it definitely is achievable.

Over 20% pa for ten years straight? That is equivalent to multiplying your wealth by a factor of more than 6 over ten years. There are some here with bravado who might make you think that they are doing this. I would say they are presenting selective information. 20% over one year on a broadly based portfolio is very achievable in the right market conditions. Doing that for ten years plus on end, I would say is impossible using 'good companies/investments', (another phrase for Blue Chips).

I think you would need a lot of leverage and luck to get 20% pa consistently over the market cycle. You would probably have to invest in spec shares and takes lots of risks to do it. Leverage you can maintain. Luck runs out. That's the problem.

There are some here I am sure who have made 20%+ per year for five years on an 'emerging portfolio'. I reckon that if they stick to those same tactics there is a fair chance they will have lost all of their investment funds by the time the investment clock ticks over ten years. You can claim you are successful and still go bankrupt. Ask David Ross and those whose fortunes he destroyed. Claiming way in excess of market returns with a large pot of capital over a long period of time is what gave his game away in the end.

The lesson: be realistic with your long term investment targets.

SNOOPY

[IAK]

Depends if you live in Auckland or the provinces.

[Winston001]

I've been buying (and generally holding) shares for 30 years. It has been enjoyable but not particularly profitable.

In the same period I have watched relatives friends and clients who have never been near a university, quietly and modestly working hard buying houses and/or farms. They have never considered the share market because they think it's for clever people.

They have been much wiser in terms of wealth and also in terms of lifestyle. It is humbling to reflect upon.

Don't know if this helps but if I did it again, I'd invest less in shares, more in property, and always pay down debt. Seen too many broken marriages and bankrupts over the years.

[Schrodinger]

Over 20% pa for ten years straight? That is equivalent to multiplying your wealth by a factor of more than 6 over ten years. There are some here with bravado who might make you think that they are doing this. I would say they are presenting selective information. 20% over one year on a broadly based portfolio is very achievable in the right market conditions. Doing that for ten years plus on end, I would say is impossible using 'good companies/investments', (another phrase for Blue Chips).

I think you would need a lot of leverage and luck to get 20% pa consistently over the market cycle. You would probably have to invest in spec shares and takes lots of risks to do it. Leverage you can maintain. Luck runs out. That's the problem.

There are some here I am sure who have made 20%+ per year for five years on an 'emerging portfolio'. I reckon that if they stick to those same tactics there is a fair chance they will have lost all of their investment funds by the time the investment clock ticks over ten years. You can claim you are successful and still go bankrupt. Ask David Ross and those whose fortunes he destroyed. Claiming way in excess of market returns with a large pot of capital over a long period of time is what gave his game away in the end.

The lesson: be realistic with your long term investment targets.

SNOOPY

Think of it this way as KW again pointed out: a couple of 10-30 baggers, a mixture good stocks paying 5% div and the other broad portfolio pulling 10-15%. Definitely agree doing this over 10 years you would be in the elite 0.001%.