# Borrow money and earn more on savings interest then borrowing cost?



## landlord (7 Jul 2008)

Mathematicians please help…..

  I will be borrowing 100,000 Euros soon for an extension. This money will come from topping up three buy to let mortgages. I will be repaying this debt interest only at ECB + .75% which is 5 % currently. This will be 417 per month.  5,000 per year. 
  I do not intend to use this money to extend until I am comfortable with ECB rate trends and the way the economy/my job is going. Therefore I will wait approx one year from now. 
  The 100,000 will be placed in: 2 x First active 5.22% accounts at 14,500 in each, 2 x  Anglo Irish Bank premium demand at 5.3% and 20,000 in each and the remaining 31,000 in 1 Northern Rock account at 5 % and from there will be drip fed at 1,000 Euro per month into:

  2 x Anglo Irish 8% accounts
  2 x Irish Nationwide at 7.6%
  2 x EBS at 7.5%
  2 x first active at 7.15%

  (2 x )   (reflects 2 accounts one for me and one for my girlfriend)

  Assuming these rates remain for one year from now ( I am sure another product will replace them when these rates expire) is it possible to earn more on the savings when accounting for DIRT than the cost of the mortgage top ups which will be 5,000 per year.  
  Will be grateful if anyone is able to work this one out !!! I am curious if you can earn more on savings than it costs to borrow the money??


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## randombloke (7 Jul 2008)

Eh....inflation...?
Try borrowing your money in Japan mate and you might do ok.
Seriously think about the inflation. 
Basically the 100K you borrow after you pay and receive interest may be worth €100,300 in a year assuming 5% borrowing and 5.3% deposit interest (-20%DIRT), actually make that about €99,200 when you take out your DIRT. Then that cash will have the spending power of about €95,000 in todays money, so you will in effect have lost about 5 grand, assuming an annual inflation rate of 3-4%.

Mind you, you will feel wealthy enogh with 100K on deposit...


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## z106 (7 Jul 2008)

Yep. Inflation is the problem.

You'd have to walk away with c. 104k just to break even assuming 4% inflation.

Had you been right then it would be basically printing money.

I think the tern for what you are thinking of is called a carry trade.
i.e. borrowing in a low interest area (E.g. Japan) and put on deposit in a high yield account (E.g. NEw Zealand).


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## Brendan Burgess (7 Jul 2008)

The inflation is irrelevant to this discussion as he is borrowing to invest. 

landlord, just do the sums one by one. You will pay 20% Dirt on your interest, so that will wipe out any profit.

You are also doing a lot of work.

You are taking a risk that one of the banks might go bust. 

Not worth it.

brendan


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## z106 (7 Jul 2008)

Brendan said:


> The inflation is irrelevant to this discussion as he is borrowing to invest.


 
Not sure i understan your point here Brendan.
Inflation is very relevant as I see it.

The crux of his query as I understand it is basically can you make a profit by borrowing at one rate and making more money by depositing it someplace else at a higher rate.

In whiuch case,assuming 4% inflation, the OP would have to make a 4k 'profit' after DIRT to break even.


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## Brendan Burgess (7 Jul 2008)

inflation is simply irrelevant. 

He borrows €100k and invests €100k. He makes a profit of €2k. He pays off his loan and still has €2k in the bank. 

You are confused about the need to preserve the real value of money. If I have €100k cash to invest and get a return of 4%, while inflation is 6%, my real return is -2%. 

But inflation works on both sides - the borrowings and the investment, so it's simply not relevant. 

Brendan


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## z106 (7 Jul 2008)

Brendan said:


> inflation is simply irrelevant.
> 
> He borrows €100k and invests €100k. He makes a profit of €2k. He pays off his loan and still has €2k in the bank.
> 
> ...


 
You are quite right.

My mistake.

Inflation only affects the 2k in your example.


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## d15ude (7 Jul 2008)

Brendan said:


> inflation is simply irrelevant.
> 
> He borrows €100k and invests €100k. He makes a profit of €2k. He pays off his loan and still has €2k in the bank.
> 
> ...


 

second that!

as long as you achieve a return that is higher than your payments you are fine. 
but if you factor in DIRT it will be very hard to find such a deal.

if ya do let us know


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## landlord (8 Jul 2008)

Brendan said:


> inflation is simply irrelevant.
> 
> He borrows €100k and invests €100k. He makes a profit of €2k. He pays off his loan and still has €2k in the bank.
> 
> ...



Thanks guys.......I was up last night trying to figure out why inflation would make a difference, but convinced my self that it wouldn't.  It seems I was right. 
Brendan, my preference would be to borrow the money next year when we are ready to extend which would mean this exercise would not be relevant, but the value of the RIPs would reduce by then and I probably would not be able to borrow enough money to extend.  I still would have a healthy positive cash flow (mortgage/rent) after top up.   Regarding your point about it being risky in case one bank went bust.  Would it not be safer depositing money in many different bank accounts rather than all in one (unless it Northern Rock of course). 
Also.....making profit by doing this would be great, but I would be happy with just reducing my losses.
As no mathematicians are volunteering them selves to help me out, I will try to crunch the numbers myself. Can someone let me know how you calculate a years interest in one of these regular savers accounts. For example 1,000 per month for 1 year in Anglo s  8% account ?


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## brian1 (8 Jul 2008)

landlord said:


> Regarding your point about it being risky in case one bank went bust.  Would it not be safer depositing money in many different bank accounts rather than all in one (unless it Northern Rock of course).



Yes, with the caveat that for Irish banks your only covered for 90% up to  €20,000, so if you have €20,000 in the account you would only get €18,000 back.



landlord said:


> As no mathematicians are volunteering them selves to help me out, I will try to crunch the numbers myself. Can someone let me know how you calculate a years interest in one of these regular savers accounts. For example 1,000 per month for 1 year in Anglo s  8% account ?



This calculator should help you with it:

http://www.askaboutmoney.com/clubman/CompoundCal.htm#rjava2


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