PDA

View Full Version : Extend Mortgage to Buy Shares in these Times?



Entrep
21-03-2020, 10:41 AM
If you have plenty of equity and are comfortable paying the debt, even without dividends, would you ever consider adding to your mortgage in times like these, to truly take advantage? The dividends would more or less cover the interest if you choose wisely and the interest would also be deductible against the dividends, I imagine.

Anyone considering this or done it before and have some tips?

macduffy
21-03-2020, 03:42 PM
Here's a tip - don't!

PS: Not advice!

;)

winner69
21-03-2020, 03:51 PM
Here's a tip - don't!

PS: Not advice!

;)

If I’d ask I would take it as good advice though

kiora
21-03-2020, 05:10 PM
If you have plenty of equity and are comfortable paying the debt, even without dividends, would you ever consider adding to your mortgage in times like these, to truly take advantage? The dividends would more or less cover the interest if you choose wisely and the interest would also be deductible against the dividends, I imagine.

Anyone considering this or done it before and have some tips?

I did it in 2009 with 2 revolving credits and ready now for the green shoots to appear to hit the button.I had to wait until 2011 to see the right opportunity.
Same again now.Just waiting for right opportunity.Stock must be dividend paying,low/no debt and good cash flow.
Interest is tax deductible.
I always keep some of the RC in reserve,typically one year of interest & living expenses

blackcap
21-03-2020, 05:11 PM
I have mine ready and waiting. Going to go reasonably deep but not pulling the trigger yet.

smpl
21-03-2020, 06:56 PM
Phase 1: Buy S&P < 1500
Phase 2: Buy S&P all in if under 666

couta1
21-03-2020, 08:44 PM
If you have plenty of equity and are comfortable paying the debt, even without dividends, would you ever consider adding to your mortgage in times like these, to truly take advantage? The dividends would more or less cover the interest if you choose wisely and the interest would also be deductible against the dividends, I imagine.

Anyone considering this or done it before and have some tips? I've had 300k on the house for about 6 yrs now at a higher interest rate than the current average (About 4.8%) the house was almost mortgage free before I topped up mind you, just like owning a rental property they are interest only loans and yes the interest is tax deductable. I think it's a good idea if you keep the loan at a modest level compared to your total portfolio value, also you cant get a margin call which removes a lot of possible stress, depends on your age also and as I hit 60 next year I will probably repay the loans as they come off their terms which occurs next year also.

Beagle
22-03-2020, 10:45 AM
If you have plenty of equity and are comfortable paying the debt, even without dividends, would you ever consider adding to your mortgage in times like these, to truly take advantage? The dividends would more or less cover the interest if you choose wisely and the interest would also be deductible against the dividends, I imagine.

Anyone considering this or done it before and have some tips?

Yeah, never buy shares in a downtrend, especially with money that is not yours. Wait for the bottom. I don't know you age or how secure you think your income and / or your partners income is but are you absolutely certain you will still have the secure income to service the debt if we end up in another Great depression ?

The economic impact of Covid-19 is unprecedented in our lifetime and many who lose their incomes may never have considered that their income could be at risk.

BIRMANBOY
22-03-2020, 11:18 AM
Unfortunately, you have assumed that your choices of dividend payers will be accurate as well as forthcoming. It is possible, admittedly in a worst case scenario that previously highly reliable dividend payers could be forced to stop, postpone or drop the "normal" dividend due to unforeseen circumstances. One for example could be energy suppliers cutting prices due to govt intervention/requests/directive...people out of work unable to pay energy bills. No profits equals no dividends. Farfetched ..maybe but relying on dividends to pay interest is still slightly risky. I guess it depends on how much easily accessible equity you have and your appetite for risk. Also if you are ADDING to your existing mortgage what or how is your ability to service that going to be effected. What about potential loss of employment? Loss of customers if self employed? Severe downsizing/contraction in economy will surely have some effect on everyone. Reliance on information from the past is no way to predict or plan for the future when we are in uncharted territory. Even if you do go ahead and increase your mortgage, how sure can you be that the your choice as to timing is good and that your targets will retain the same characteristics as before? Lastly, even if you are sitting on megabucks of equity, do you want to risk it in a new environment? PS not considering this and never done it previously.
If you have plenty of equity and are comfortable paying the debt, even without dividends, would you ever consider adding to your mortgage in times like these, to truly take advantage? The dividends would more or less cover the interest if you choose wisely and the interest would also be deductible against the dividends, I imagine.

Anyone considering this or done it before and have some tips?

Snoopy
22-03-2020, 12:26 PM
If you have plenty of equity and are comfortable paying the debt, even without dividends, would you ever consider adding to your mortgage in times like these, to truly take advantage? The dividends would more or less cover the interest if you choose wisely and the interest would also be deductible against the dividends, I imagine.

Anyone considering this or done it before and have some tips?


Entrep, to say 'yes' to your proposal (with one caveat) you have to be convinced that you know more about the company you are investing in than the directors do. Let me explain.

The issue here is that directors of a pubic company have a fiduciary duty to ensure a company is appropriately capitalised at all times. Company directors are effectively asked to sign off what they consider to be an appropriate debt ratio for the coming year, given their knowledge of the coming year business plan. There is no 'one number' that determines whether a debt ratio for a company in general is satisfactory or not. This is because the industry class and business characteristics of many companies are different. The debt ratio of a publically regulated utility can be much higher than say a company that sells discretionary fashion items as an example. As a share owner, you are a company owner. So each share you own carries an 'underlying equity asset value' accompanied by a 'share of debt', in exactly the same proportion as is listed on the balance sheet of the company. That means if you own shares in a company that carries debt, then you are already leveraged. If you then borrow to invest in a particular share, then the underlying leverage of the share you own is further leveraged by your own borrowing ratio. The income from each share you own does not increase if you leverage to buy it though.

By 'borrowing to invest' in this way, you having increased your own leverage in the company you invest in a way that the directors of the company would very likely not be comfortable with. Remember if the directors were comfortable with this, they would have a fiduciary duty to return excess capital to shareholders. And that would leverage up the debt of the company automatically without you, as a shareholder, doing a thing!

SNOOPY

P.S. The one caveat to what I am saying is this. If you own a broad based portfolio of shares, then the nature of that broad base reduces the portfolio risk. So there is an argument that you could leverage your portfolio in a way that offsets the lesser risk you have by owning a broad based portfolio of shares. Your own 'portfolio risk' is something that cannot be managed by individual company directors, so it is something you can legitimately compensate for by 'borrowing to invest'.

Entrep
23-03-2020, 04:27 PM
Thank you everyone, appreciate the responses and you all taking the time to do so.

I'm also speaking with my accountant and other advisors about this.

Cheers

JBmurc
23-03-2020, 07:11 PM
If you have plenty of equity and are comfortable paying the debt, even without dividends, would you ever consider adding to your mortgage in times like these, to truly take advantage? The dividends would more or less cover the interest if you choose wisely and the interest would also be deductible against the dividends, I imagine.

Anyone considering this or done it before and have some tips?

I have for many many years have a company loan I use for trading and investing in the market(Using property equity to secure low rates 3.8% currently) ..I wish like many I had paid it off couple months back and be in a position to redraw the funding with all of my companies I've invested in down hard last few weeks and be buying in over the nest few weeks of Maximum FEAR induced selling ...

did sell down companies I believe will do worse over the near term and purchased another ASX AUD Gold play well cashed up with a plant and Gold reserves in place for 50% less than it was trading at weeks ago

Beagle
26-03-2020, 11:42 AM
Leverage really does magnify losses and is very very dangerous at times like this. Heard of one case very recently by PM where an investor, (who obviously I won't name and breech confidence) has lost a tremendous amount of capital, far more than the amount the shares he owns have fallen. Much too dangerous a strategy at the current time in my opinion.

Entrep
26-03-2020, 11:49 AM
I don't really consider it leverage when it's a 25 year loan (would be paid off early of course) and there is zero chance of liquidation

Snoopy
27-03-2020, 09:10 AM
I don't really consider it leverage when it's a 25 year loan (would be paid off early of course) and there is zero chance of liquidation

"A loan is not a loan because it has a 25 year term."

It is amazing what logic can come out when people are very determined to gloss over the consequences of their leverage. There is never zero chance of liquidation. What happens if you or someone in your family got cancer and you needed funds to purchase one of the new drugs not yet funded by Pharmac? What would happen if the value of 'grannies jewellery', or your classic car' collapsed when you had to sell it in an emergency to cover the loan? What would happen if your bank collapsed and all the loans had to be bought out and refinanced by another party?

If you must leverage your share portfolio (big emphasis on that word, not just one or two favourite shares) I would keep that leverage to no more than 10% of the portfolio value.

SNOOPY

Entrep
27-03-2020, 09:33 AM
Appreciate your input Snoopy, it's certainly a loan and will have (minimal) repayment and cashflow impact.

Leverage to me means a chance to get liquidated. Liquidation is possible with everything in life. The $10K I put into the market today could be $0 tomorrow and the next week I might need money urgently.

I have considered my financial position with my accountant too and the real chance of liquidation is nil unless the world ends. If that happens this small loan will be the least of my worries.

Snoopy
27-03-2020, 12:56 PM
Appreciate your input Snoopy, it's certainly a loan and will have (minimal) repayment and cashflow impact.

Leverage to me means a chance to get liquidated.


I have a rather different understanding of the word 'leverage'. To me, there is no hint of recklessness in that word. 'Leverage' just means any investment where some part of that investment, however small, is paid for by borrowing.



Liquidation is possible with everything in life. The $10K I put into the market today could be $0 tomorrow and the next week I might need money urgently.

I have considered my financial position with my accountant too and the real chance of liquidation is nil unless the world ends. If that happens this small loan will be the least of my worries.


Fair enough Entrap. You have not further disclosed your overall financial position, when even despite you being an anonymous person on the internet, I would not advise nor expect you to do so. Yet it does sound as if you could stand your new borrowed $10k investment being totally wiped out, and yet still be OK. So it sounds like you have evaluated your risk of doing this in a careful and considered way. All the best with it.

SNOOPY

kiora
27-03-2020, 08:05 PM
If you have plenty of equity and are comfortable paying the debt, even without dividends, would you ever consider adding to your mortgage in times like these, to truly take advantage? The dividends would more or less cover the interest if you choose wisely and the interest would also be deductible against the dividends, I imagine.

Anyone considering this or done it before and have some tips?

Coming back to the original question
In my view there is substantially less risk in doing this now than 3 months ago
The market is being restricted by liquidity now and this gives you the advantage of liquidity when the market is a lot cheaper and there is more transparency as to outlooks.
A far less risky preposition than property in my view
Landlords are being squeezed dry with their equity positions being under review and no income from their tenants.
Property investments will be a train wreck unless something changes for the better
" A report by JPMorgan estimates balanced or 60:40 mutual funds, a $1.5 trillion universe in the US and $4.5 trillion universe globally, need to buy around $300 billion of equities to fully rebalance to 60% equity allocation. At the same time, the $7.5 trillion universe of US defined benefit plans, would need to buy $400 billion to fully rebalance and revert to pre-virus equity allocations. Finally, there are the “balanced” sovereign pension funds such as Norges Bank and GPIF, which according to JPM would need to buy around $150 billion of equities to fully revert to their target equity allocations of 70% and 50%, respectively."
https://www.goodreturns.co.nz/article/976516561/recovery-from-coronavirus-a-buying-opportunity.html?utm_source=GR&utm_medium=email&utm_campaign=GoodReturns+Market+Report+for+27+Mar+ 2020
https://www.interest.co.nz/rural-news/104276/guy-trafford-hunkers-down-keeps-things-ticking-over-sceptical-about-banks-watches
https://www.interest.co.nz/opinion/104234/gareth-vaughan-looks-strenuous-efforts-authorities-are-making-keep-debtcredit-taps
https://www.goodreturns.co.nz/article/976516561/recovery-from-coronavirus-a-buying-opportunity.html?utm_source=GR&utm_medium=email&utm_campaign=GoodReturns+Market+Report+for+27+Mar+ 2020

voltage
29-03-2020, 09:16 AM
Buffett never recommends leverage into stocks. Only purchase stocks with surplus funds. How do you know where the bottom is? It can get a lot worse. I do not think this will be over in 3 months but only when a vaccine is produced.

kiora
29-03-2020, 12:40 PM
Buffett never recommends leverage into stocks. Only purchase stocks with surplus funds. How do you know where the bottom is? It can get a lot worse. I do not think this will be over in 3 months but only when a vaccine is produced.

Or other peoples money.His first purchase was an insurance company.
"investing the money taken in as premiums that have not yet been paid out for claims, a sum of money known as the float. For example, if an insurer is holding $1 billion in anticipation of future claims, the company is free to invest the money in the meantime and keep the profits."
Just leverage in another form
https://www.fool.com/investing/2019/02/22/warren-buffett-and-the-insurance-business-a-52-yea.aspx

fungus pudding
29-03-2020, 12:43 PM
Buffett never recommends leverage into stocks. Only purchase stocks with surplus funds. How do you know where the bottom is? It can get a lot worse. I do not think this will be over in 3 months but only when a vaccine is produced.

Which means do not buy stocks until your mortgage is repaid, otherwise you are gearing by choosing to use borrowed money over your pocket money. That advice, if followed, would crucify the share market.

JBmurc
30-03-2020, 01:38 PM
Buffett never recommends leverage into stocks. Only purchase stocks with surplus funds. How do you know where the bottom is? It can get a lot worse. I do not think this will be over in 3 months but only when a vaccine is produced.

And if you have access to zero rates like the major Banks in the USA .. or some countries around the world like Denmark’s Jyske Bank JYSKY, -3.81%, is now offering a 10-year fixed-rate mortgage at negative 0.5%.

Additionally, Finland-based Nordea Bank will offer a 20-year fixed-rate mortgage in Denmark that charges no interest, and the bank is preparing for the possibility of home loans up to 30 years in duration having negative rates. Currently, the rates on 30-year fixed mortgages average just 0.5% in Denmark.

When a mortgage rate is negative, a borrower still must make monthly payments toward their principal, but they ultimately pay back less than they originally borrowed. They would, of course, still have to pay other costs and fees.

peat
30-03-2020, 02:41 PM
As a conservative investor I re-iterate that one shouldnt buy shares with borrowed money. The companies mostly already have debt and highly likely other people are leveraged into their positions which all makes a mountain of debt when risk off becomes in vogue and what we have just witnessed occurs.

It is hard to take this stance when you have access to funds and the market is going up = but if one cant purchase ones shares outright then one shouldnt be playing the game.

One should have a lot of other non equity investments alongside any share portfolio. That percentage of equityinvestments to debt investments can change though , so that is how you up the ante if you choose to, you drawdown your cash and TD's and sell your bonds to buy more equities.

I'm doing that a little at the moment.

JBMurc , I knew some countries were negative but I didn't realise banks were paying people who borrow !! Does my head in.





Although if we get

Entrep
30-03-2020, 02:46 PM
Ethics aside, you think the private equity industry shouldn't exist then, management buyouts?

peat
30-03-2020, 03:14 PM
Ethics aside, you think the private equity industry shouldn't exist then, management buyouts?
no not at all.
its just a question of risk for me. its too risky as an individual investor to leverage. I'm picking its the leveraged who caused the extreme downside recently and I imagine some of them are hurting hard because whoever lent them the money will sell at any price once the margin call is unpaid.

Entrep
30-03-2020, 03:43 PM
Agree that leverage like with CFDs or Commsec etc is risky but I am talking about a loan secured over my home. There is no margin call that can be made

peat
30-03-2020, 03:48 PM
Agree that leverage like with CFDs or Commsec etc is risky but I am talking about a loan secured over my home. There is no margin call that can be made

yes there is, when the value of your house falls below the equity you have in it including the shares. Then you lose your job and cant pay the mortgage.

You cant absolutely rely on dividends or your job , you might get sick or be unable to work and health insurance doesn't cover it for example.

Only you can judge the risk on these possibilities but bad stuff can happen to anyone.

Entrep
30-03-2020, 04:00 PM
yes there is, when the value of your house falls below the equity you have in it including the shares. Then you lose your job and cant pay the mortgage.

You cant absolutely rely on dividends or your job , you might get sick or be unable to work and health insurance doesn't cover it for example.

Only you can judge the risk on these possibilities but bad stuff can happen to anyone.

Of course that, I didn't think that needed to be said. That's not a margin call in the traditional sense of the word. If I spend $100K on a car (instead of mortgage, or buying shares outright) and then lose my job and crash the car, and can't pay my mortgage, and they foreclose, I don't think it's called a margin call.

This thread is about utilising home loans for shares. Not opening up a leveraged trading account.

peat
30-03-2020, 06:39 PM
Of course that, I didn't think that needed to be said. That's not a margin call in the traditional sense of the word. If I spend $100K on a car (instead of mortgage, or buying shares outright) and then lose my job and crash the car, and can't pay my mortgage, and they foreclose, I don't think it's called a margin call.

This thread is about utilising home loans for shares. Not opening up a leveraged trading account.

well imho everything needs to be said otherwise folks assume.
margin call / bank recall - its all the same effect if you have no cash or cashflow.
Did you know that your mortgage can be called at any moment!!??

Beagle
01-04-2020, 10:35 AM
You should never risk the safety and security of your family home for shares. That's gross recklessness in the current circumstances in my opinion.

This is going to be really bad https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12321458

macduffy
01-04-2020, 11:04 AM
You should never risk the safety and security of your family home for shares. That's gross recklessness in the current circumstances in my opinion.

This is going to be really bad https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12321458

Exactly, Beagle! I'm not sure that everyone realises the gravity of the situation yet.

Entrep
01-04-2020, 06:32 PM
You should never risk the safety and security of your family home for shares. That's gross recklessness in the current circumstances in my opinion.

This is going to be really bad https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12321458
You risk it every day you put money into something other than your mortgage and whether it is reckless or not depends on a number of factors including equity, salary and industry which I didn’t specify and don’t intend to

kiora
01-04-2020, 07:42 PM
Exactly, Beagle! I'm not sure that everyone realises the gravity of the situation yet.

Yes I agree except conversely gravity = potential opportunity for investors

smpl
01-04-2020, 08:40 PM
Reckless, had good a laugh. It's reckless to have all your money in property.

peat
01-04-2020, 10:24 PM
You risk it every day you put money into something other than your mortgage and whether it is reckless or not depends on a number of factors including equity, salary and industry which I didn’t specify and don’t intend to
absolutely, all these are factors that come into your decision making, including your degree of risk acceptance, your insurance cover, a 2nd income , no. of kids, which is why we can only go by the guideline - which is don't do it.

If you know all these things and they are well sorted then you may be able to come to a decision to ignore all the advice , take the risk, and in 5 years time you'll be laughing your way to a mega portfolio - maybe.

kiora
02-04-2020, 03:50 AM
absolutely, all these are factors that come into your decision making, including your degree of risk acceptance, your insurance cover, a 2nd income , no. of kids, which is why we can only go by the guideline - which is don't do it.

If you know all these things and they are well sorted then you may be able to come to a decision to ignore all the advice , take the risk, and in 5 years time you'll be laughing your way to a mega portfolio - maybe.

I concur with you Peat.
Tick
Low interest rates for a while.
What happens when all the helicopter money is looking for a return
Mega potential for portfolio returns as per 2009
Just be wary if inflation picks up
Mega potential for portfolio slashed also so I have diversified portfolio of investments

Revolving credit available & ready.less risky than CFD's

peat
02-04-2020, 01:22 PM
your insurance cover,
maybe needs to be clarified what should be put into place

If I was taking risks relying on my income I would stump up for some sort of permanent disability insurance , and life insurance with enough cover to buy the portfolio outright and provide sufficient income for the wife and kids.
Unexpected stuff can happen, and you should see these insurance costs as the price for taking on extra risk and mitigating that risk wherever it is possible to do so.

fungus pudding
02-04-2020, 01:56 PM
You risk it every day you put money into something other than your mortgage and whether it is reckless or not depends on a number of factors including equity, salary and industry which I didn’t specify and don’t intend to

The choice with money, to put it into your mortgage - or into another asset, can't ever avoid the risk of choosing the worst option.