# Have good income but no savings - how do i borrow to invest?



## Ishmael (18 Jun 2007)

Dear all,

Current Status: Home Owner with fixed mortgage and have  €1,500 of post tax income available per month to service debt;

I have no other liabilities other than mortgage.

Objective: I wish to invest now in a high yield fund by borrowing monies at 8.1% and leave for 7 - 10 years.

Question: How do I obtain said funds that €1,500 can service at 8.1 % pa  (ie circa €18,500) and invest immediately in a geared fund that offsets my interest payments with the dividends received from the high yielding shares ? I believe that Bloxham offer this type of fund but I am not sure of the reqs they impose on investors....

Opinions/advice much appreciated

I


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## ClubMan (18 Jun 2007)

Borrowing at 8.1% to invest means that you need to make 8.1% (net of any taxes) to breakeven! Are you sure that this is a good idea?


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## aishling (18 Jun 2007)

Sounds slightly crazy to me! Would you not be better off investing each month an amount you actually can afford without borrowing? It sounds to me the only winner here will be the bank! What return are you expecting?


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## Ishmael (18 Jun 2007)

Clubman,

Thanks for the reply, 

The 8.1% cost of investing would be reduced (I hope) by investing in a high yield fund administered by a life assurance fund. This fund reinvests dividends and avoids taxing them until withdrawal which is taxed at 23% and not 42% if shares are held directly. 

Thus the tax saving would reduce the real cost of borrowing to a more acceptable level.

Also, an annual return of 8.1% p/a is not unimaginable over a 7 year period which I would be aiming to maintain.

The risk just seems acceptable to me when one considers that many people borrow to purchase cars that depreciate immediately on acquisition and can be wiped out as an investment at any time (crashing theft etc)...??

Perhaps my rationale is too simple ??
Thanks 
I


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## Ishmael (18 Jun 2007)

aishling said:


> Sounds slightly crazy to me! Would you not be better off investing each month an amount you actually can afford without borrowing? It sounds to me the only winner here will be the bank! What return are you expecting?


 
Crazy??????

Aisling with respect the entire nation has just invested enormous amount in a load of shoddy dumps (AKA apartments) as investment products at variable interest rates - which are increasing - at similar gearing levels of 100%...and this was/is regarded as a "solid" investment?????? 

The only difference between them and my proposal is the investment product under consideration...ie shares and not bricks and mortar....

Remember - in the long run shares perform just as well if not better than property and as such deserve equal consideration when one is thinking about invesmenting.......

Lastly, the whole point of obtaining funding is to maximise return and enable asset acquisition - it's quite common - you may have heard of 100% mortgages??????

Thanks,
I


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## CCOVICH (18 Jun 2007)

You are comparing borrowing to invest (which I don't consider to be a necessity) to borrowing for personal use (car, home) which isn't really comparing like with like, i.e there is a utility value with borrowing for cars and homes etc.

Nobody (so far) has argued that borrowing to invest in property is a 'solid' investment.

Your impasssioned reply to _aishling's_ post suggests that you have already made up your mind?

If you have crunched the numbers and believe they make sense, and have appraised yourself of the risks and are happy that they are in line with your tolerance, then by all means you should go for it.


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## bacchus (18 Jun 2007)

Leaving aside as to whether this is a good idea or a crasy one.....

Apply to Tesco for a €30k loan at 6.9% APR over 2 years (€1340 repayment per month) saying it is for a new car. This will give you €30k to invest now but still need obviously to service the loan every month....


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## gonk (18 Jun 2007)

Ishmael said:


> The only difference between them and my proposal is the investment product under consideration...ie shares and not bricks and mortar....


 
There is a major difference in the tax treatment of the two options. If you borrow to invest in property, you can set loan interest and other expenses off against rental income for income tax purposes.

If you borrow to invest in equities, you cannot do this. So you pay tax on all of the dividends you receive.

If you are pursuing this approach, I would suggest you give consideration to some of the geared equity funds on the market. These borrow within the fund and are structured to be tax-efficient in regard to offsetting interest costs and gains on investment. It also means you are not borrowing personally and don't reduce your own borrowing capacity for other purposes. 

By the way, lying on a loan application as has been suggested could constitute fraud.


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## Ishmael (18 Jun 2007)

Thanks gonk,

Was that not what I suggested in my first post ? Do you know of any investment houses that provide the finance and the fund all in house?

Thanks,
I


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## gonk (18 Jun 2007)

I may have misunderstood your post, but I thought you were proposing to borrow the money personally to invest. I'm sure you understand gearing an investment increases the potential gains, but also will magnify losses if the investment falls in value.

More info on Bloxham's Geared High Yield Fund here:



The level of gearing at 50% is not high compared to typical gearing levels of 80% or 90% for property investments.

If what you are suggesting is borrowing money to invest in a fund which is itself geared, you are doubling the risk from gearing and as I have already pointed out, it is tax inefficient. Think carefully before doing this.

Another way of gearing an equity investment is through the use of spreadbetting. This is also attractive from a tax point of view, as gains are treated as gambling winnings and are tax free. Be careful here too though - it is easy to take a highly geared position which could result in the loss of your entire investment if markets go against you. Have a look at these two recent threads for more info:

http://www.askaboutmoney.com/showthread.php?t=56918

http://www.askaboutmoney.com/showthread.php?t=55816


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## ClubMan (18 Jun 2007)

gonk said:


> I may have misunderstood your post, but I thought you were proposing to borrow the money personally to invest.


So did I.


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## CCOVICH (18 Jun 2007)

Me three.


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## Howitzer (18 Jun 2007)

Ditto


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## Brendan Burgess (11 Aug 2007)

Hi Ishmael 

The fact that other people are making bad investments in "shoddy dumps" with 100% mortgages, is not a justification for you to make a less bad investment decision. 

Where are you getting the 8.1% from?  Borrowing to invest is a good idea if you are able to handle the downsides and if the borrowing is cheap. At an interest rate of 8.1%, the risk would far outweigh any potential gain. 

You should take out an additional mortgage on your home at around 5% as this is by far the cheapest form of borrowing. If your mortgage provider won't provide you with extra borrowings, it suggests that your mortgage is too high and you should not be borrowing to invest. 

Normally you should use the surplus income to increase your monthly mortgage repayments, but if it is a fixed rate mortgage, that won't be possible until the fixed-rate period is up

Brendan


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## tyoung (11 Aug 2007)

Borrowing to invest may be yesterday's game. Lenders are getting picky.


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## castle2j (15 Aug 2007)

Here's an example using the case of €30k borrowed over 3 years @7.5%

Monthly payment - €933.19

Over 3 years, the loan would cost about €3600 in interest meaning you would need about 4% return p.a. before you recoup these costs.

All returns below would be before taxes, fees, etc.

Scenario A
Investing the €30k _from the offset_ will leave you with the following amounts after 3 years (assuming continuously componded interest)

@3% annual return - €32,835
@4% annual return - €33,825
@6% annual return - €35,916
@8% annual return - €38,137
@10% annual return - €40,496

Scenario B
_Investing the same €933.19 on a monthly basis _(i.e. taking on no debt) for three years at the same rates of return as Scenario A will yield you the following:

@3% annual return - €35,197
@4% annual return - €35,753
@6% annual return - €36,900
@8% annual return - €38,095
@10% annual return - €39,341


So, at low-medium (realistic?) rates of return, you are not at all compensated for the risk of borrowing €30k when compared to a regular, monthly investment. Even at 10% annual return, you will see just €1000 extra in return for your risk. Maybe others can clarify whether having €30k to invest from the get-go would allow a greater chance of achieving higher returns....

The only thing I can think of is that fees and other charges for whatever you invest in could be an issue when paying regular monthly increments. This could be offset by the fact that you will pay less tax in Scenario B (investment is approx. €933 _x_ 36 = €33,595) than Scenario A (taxed on everything above €30,000)


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