Author Topic: I want more debt!  (Read 3853 times)

Richard3

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I want more debt!
« on: September 12, 2012, 12:14:00 PM »
I thought that was a nice provocative title.

So, I have a house and have about 60% equity in it. I could just about pay it off next week if I liquidated everything but some of my assets are locked away and I want diversification anyway. The interest rate I pay is going to be going up to 5% very soon because my bank are greedy scumbags.

So I need to refinance to avoid giving more money to my bank who have shown no interest in a long term business relationship.

I can probably refinance to a floating mortgage at base rate +2.14% (so 2.69% right now plus transaction costs). A well diversified income portfolio yields about 4% at the moment. There are no early repayment penalties on this new mortgage.

My thinking is that I take the new mortgage for the maximum (70% Loan To Value) and the longest time period (so smallest repayments) I can. As long as my dividend / bond portfolio is yielding more than the interest rate I pay the minimum. As soon as interest rates rise or yields fall and the rates cross, I liquidate some assets and go in to debt emergency mode.

In theory I am making (Yield minus Interest rate) return on the balance of my mortgage which is one or two thousand a year so definitely not to be sneezed at and I am getting a nice little tax deduction on the mortgage interest too. Obviously it's not risk free (the value of your investments may go down as well as up) but we haven't started talking about the benefits of ~4% inflation yet.

So, which am I?

A) being too clever for my own good,
B) working the system... LIKE A BOSS!

Additional comments suggestions etc are welcome.

mechanic baird

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Re: I want more debt!
« Reply #1 on: September 12, 2012, 12:38:01 PM »
You are not alone man.. I have been debating about it these days...

My portfolio returned nearly 20% this year.. I just felt that I shouldn't be throwing this money at a low rate mortgage.. The asset allocation I used produced 6% income, which kicked the mortgage rate's ass.. Plus appreciation, it has been a great year so far..  Although stock market has been going very strong this year,it could change at any given second.. That's why I am hesitating.

I am using a middle ground approach these days. For the excessive money I have laying around, I will let them sit in the market and actively manage them. For the extra money I produce each month by cutting down cost, I am throwing it at the mortgage.. Sort of my own "diversification" so to speak.. If market is going good or I am lucky enough to make money in the market, that's great; if the market is beaten down, at least I got my sure return on paying down the mortgage..

bo_knows

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Re: I want more debt!
« Reply #2 on: September 12, 2012, 01:55:31 PM »
Ha.  I've recently been struggling with a similar issue.  We're probably right at 75%LTV and we're about to refi to 15yr 2.875%.  With inflation and mortgage interest deduction, this is practically free money.  However, I still think that we're going to be pounding at the mortgage with extra money.  We're planning on leaving this house in roughly 5 years for one with a yard (just had our first little one), so something in my head wants me to crush the debt rather than invest... even if the math on my Vanguard account says "Invest in me!!!"

arebelspy

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Re: I want more debt!
« Reply #3 on: September 12, 2012, 01:56:56 PM »
Hell yeah!

You're my kinda Mustachian.

I plan on retiring once I hit one million in DEBT.

(Though I'll have a very positive net worth at that point.)

We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Lars

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Re: I want more debt!
« Reply #4 on: September 12, 2012, 02:26:13 PM »
Eye catching title. I was going for C - Aggressive Investor. That seemed more helpful than A if your plan does work and B if it does, let us know in 10 years. ;-)

The path you're considering is a common one. Anyone who is paying making investments past an employer match before their mortgage is paid is leveraging their home to invest - just, obviously, not as aggressively as you are considering. I see a continium of leverage options from:
Conservative - Pay cash for home or pay down as fast as possible
Middle of the Road - Match length of home loan to be paid off when you plan to stop working (my personal choice)
Aggressive - Maximize loan and pay off length to maximize leverage

I see a few possible pitfalls to consider -
Your net worth will be more volatile

The rates could cross in a down market. To rebalance in a down market, you should be buying more stocks. With your plan you would be paying down your mortgage instead - effectively shifting your allocation toward bonds. (no rebalance bonus in your returns)

Seems like a flowing rate mortgage would be considerably less profitable once we have positive real interest rates again. Why are you choosing a flowing rate mortgage over a fixed rate one to better take advantage of the current negative real interest rates? Sure the short term payoff is greater but long term seems limited.

RoseRelish

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Re: I want more debt!
« Reply #5 on: September 12, 2012, 02:54:10 PM »
Hell yeah!

You're my kinda Mustachian.

I plan on retiring once I hit one million in DEBT.

(Though I'll have a very positive net worth at that point.)

NICE! As I tell anybody who'll listen: with these low debt costs, it's time to play Monopoly!

ShavinItForLater

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Re: I want more debt!
« Reply #6 on: September 12, 2012, 04:17:46 PM »
You haven't provided enough information for me to comment on what you are proposing.  Scale is a significant factor, especially in relation to your income.  If you are borrowing and investing a lot, to the point where you could not afford the mortgage payments if you lost your job, then I would advise against this because I would say you are taking too much risk.  If on the other hand this is small potatoes in your world, and you could handle even the worst case scenario, then maybe it's not too much risk.

By worst case scenario, I would think along these lines--the stock/bond market crashes suddenly, maybe like it did in 1987--20%+ loss in a matter of days/weeks.  Maybe you lose your job at the same time, possibly from a layoff triggered by a recession that started with the stock/bond market crash.  Can you still come out OK on this, or did you just make yourself bankrupt or in a foreclosure scenario?

I know you're saying you can just pay it off at any time, but part of liquidity is handling the sudden drops that can and do happen in the equity markets from time to time.  It's OK to take some risk, but if your plans will only work if everything goes well, then I think that's a bad plan--bad things happen, and you should have enough safety margin that it's not going to sink you when they do.

Richard3

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Re: I want more debt!
« Reply #7 on: September 12, 2012, 05:18:55 PM »
Seems like a flowing rate mortgage would be considerably less profitable once we have positive real interest rates again. Why are you choosing a flowing rate mortgage over a fixed rate one to better take advantage of the current negative real interest rates? Sure the short term payoff is greater but long term seems limited.

I could fix for 7 years at 4.3% APR but that much thinner margins (although more predicatable). A 2 year fix is still 3.8%.

One big reason not to fix the rate is that this may well not be my forever house. I believe I will want to return home, quite probably in the next few years (possibly as little as 2) and if when I do I well need / want the capital. Early repayment charges will make it painful if I've fixed.

Scale is a significant factor, especially in relation to your income. ...

By worst case scenario,...  Can you still come out OK on this, or did you just make yourself bankrupt or in a foreclosure scenario?

My current mortgage (12 years left of 15) is about 20% of my take home. My current savings is about 50% so I could pay off 75% of salary to mortgage in an emergency which would crush it in a couple years so a market downturn wouldn't be the end of the world.

I am unlikely to lose my job, the owners (private company) are very loyal to staff (a couple years ago we lost 40% of our business and got sued by the DOJ and they didn't lay anyone off).

That said, if I lost my job I'd sell the house. The only reason I live where I do is for work and it is unlikely any other job in my industry would be in the same country.

These are the things leading me to consider the aggressive approach. At the same time, leverage is a two edged sword.

It gets more complex though - I have an opportunity to rent the house to a colleague and work part time and remote for the next 12 months (or more). In some ways this increases volatility (as my income will drop and expenses rise) but the rent will cover the mortgage so that's safer in a way as I then have rent, main side hustle, and hopefully a couple small passive streams. It's also pretty much why I am working towards FI (since I enjoy about 20 hours a week of work), so since I have sort of reached the finish line, why risk stepping on a banana skin?