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  1. #1
    Senior Member Entrep's Avatar
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    Question Extend Mortgage to Buy Shares in these Times?

    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?

  2. #2
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    Here's a tip - don't!

    PS: Not advice!


  3. #3
    A BEARISH BULL winner69's Avatar
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    Quote Originally Posted by macduffy View Post
    Here's a tip - don't!

    PS: Not advice!

    If I’d ask I would take it as good advice though
    “Just consider that maybe the probability of you being wrong is higher than you think.”

  4. #4
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    Quote Originally Posted by Entrep View Post
    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

  5. #5
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    I have mine ready and waiting. Going to go reasonably deep but not pulling the trigger yet.

  6. #6
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    Phase 1: Buy S&P < 1500
    Phase 2: Buy S&P all in if under 666

  7. #7
    Trying to get outta here
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    Quote Originally Posted by Entrep View Post
    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.
    Last edited by couta1; 21-03-2020 at 09:45 PM.

  8. #8
    ShareTrader Legend Beagle's Avatar
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    Quote Originally Posted by Entrep View Post
    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.
    Last edited by Beagle; 22-03-2020 at 12:02 PM.
    No butts, hold no mutts, (unless they're the furry variety).

  9. #9
    Advanced Member BIRMANBOY's Avatar
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    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.
    Quote Originally Posted by Entrep View Post
    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?
    Last edited by BIRMANBOY; 22-03-2020 at 12:21 PM.
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  10. #10
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    Quote Originally Posted by Entrep View Post
    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'.
    Last edited by Snoopy; 23-03-2020 at 08:15 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  11. #11
    Senior Member Entrep's Avatar
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    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

  12. #12
    FEAR n GREED JBmurc's Avatar
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    Quote Originally Posted by Entrep View Post
    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
    Last edited by JBmurc; 23-03-2020 at 08:14 PM.
    People don't have ideas, ideas have people

  13. #13
    ShareTrader Legend Beagle's Avatar
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    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.
    No butts, hold no mutts, (unless they're the furry variety).

  14. #14
    Senior Member Entrep's Avatar
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    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

  15. #15
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    Quote Originally Posted by Entrep View Post
    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
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

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