Borrowing against house to invest

[Metalcat]

My father did this to invest in the late '90s.  They ended up losing most of both their savings and home equity.  I knew very little about investing at the time, but when he mentioned it to me, I told him that I thought it was reckless and he was ignoring the risk side of the equation. 

That said, mortgage and lending rates were far higher back then.  I'm sure he was probably paying somewhere in the realm of 6-8% to invest.  I would not invest (much, if any) in the stock market over a 7% risk-free rate, and I especially wouldn't leverage up.  If we're talking 2-3%, it's a conversation worth having.

In Canada we don't have 30 year mortgages, but interest is tax deductible. Prime is 2.45% right now. So the effective rate after tax deduction is about 1.5%-2% depending on your marginal income tax rate. I recently locked in my mortgage for 5 years at 1.74% - rates are very low

Yes, and housing in our major cities is astronomically expensive, and most Canadians live in major cities. So a reduction of a percent of mortgage interest for a high earner with a giant mortgage could make a difference of thousands a year.

[ericrugiero]

Although it is not precisely the same topic we are discussing, this is the best article I ever read on paying off mortgage vs investing: https://financialmentor.com/investment-advice/pay-off-mortgage-early-or-invest/7478

 he does extend the logical argument towards the end of the article and says that if you are in the "invest" camp then to remain logically consistent you should also be willing to take home equity out of your home, and because this isn't a very common thing then he acknowledges that it is always a question of doing what you feel comfortable with.

Ultimately it always boils down to risk vs reward.

The downside risk will always be a 100% loss if the bank decides to repossess, regardless of if you have $1 or $1m outstanding.  This is why I pay down no mortgage debt and focus on my investments.

What? That's not true, the bank doesn't get to just pull a "gotcha" and take the house for $1 of outstanding debt.  You still own the equity.

Yes, you get the difference between what you owe on the property and what the bank sells it for.  The problem is it's a distressed sale and they typically get much less than market value.  They also have very little incentive to get extra above what they are owed. 

You do have some options vs letting it go to a foreclosure but if you can't make the payments you could very well be forced into a quick sale in a down market. 

This is an example of the biggest problem I see with this whole scenario.  If you borrow against your home to invest, you could potentially get into trouble.  Falling stock markets and falling property values sometimes happen at the same time.  If you have the cash or income to wait for them to come back, it's no big deal.  If you can't afford to wait it out, you can lose everything.  It's a strategy that makes a lot of sense mathematically.  Just don't overdo it and be honest with yourself about the risks. 

[renata ricotta]

Although it is not precisely the same topic we are discussing, this is the best article I ever read on paying off mortgage vs investing: https://financialmentor.com/investment-advice/pay-off-mortgage-early-or-invest/7478

 he does extend the logical argument towards the end of the article and says that if you are in the "invest" camp then to remain logically consistent you should also be willing to take home equity out of your home, and because this isn't a very common thing then he acknowledges that it is always a question of doing what you feel comfortable with.

Ultimately it always boils down to risk vs reward.

The downside risk will always be a 100% loss if the bank decides to repossess, regardless of if you have $1 or $1m outstanding.  This is why I pay down no mortgage debt and focus on my investments.

What? That's not true, the bank doesn't get to just pull a "gotcha" and take the house for $1 of outstanding debt.  You still own the equity.

This seems to be a pretty common misconception for some reason. A mortgage is a secured transaction, with the house as an asset that can be liquidated to satisfy the outstanding debt. If it sells at foreclosure auction for $100k, but the bank is only owed $10k, they take $10k out of the proceeds and the rest either goes to the next creditor in line (usually people who get foreclosed on have more than one creditor) or if there are no other creditors in line, the borrower who owns the remaining equity in the house. Of course, the sale proceeds will probably be a lot lower in a foreclosure than in a typical resale, and associated costs and fees will eat into that equity, so borrower is worse off than if they saw the cash flow failure coming and sold ahead of foreclosure.

If vand means "100% loss" as in you 100% do not live in your home anymore because someone else owns it now and you have to move, I suppose that's correct. :)