Author Topic: Leverage? Foreign Lower Mortgage Rate  (Read 1462 times)

crshieh

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Leverage? Foreign Lower Mortgage Rate
« on: August 25, 2014, 09:02:17 PM »
Hello Everybody,

Here's a question I have, and I'm hoping to seek some advice, thanks in advance.

My father is a foreign alien.  He's done working, he's happy where he is, and he bought a retirement house.  The country he bought the house from has very little economic activity, and the mortgage rate is around 2%-3%.  His whole life saving can pay off the debt all at once, and live debt-free forever, or he could get a mortgage.

So, here's the question - based on the SP500 having around 7% return on average, "technically" there is a 4-5% difference to be made by taking the mortgage and throwing it in the index.  This is a "supposed" arbitrage opportunity.  However, the limitations of the scenario is:
1. He can probably apply MAX 10-15 years mortgage (he is not working that much longer, and the bank knows that) -> if he could apply a 30-year one, I'd say go for it. 
2. Every month, payments will be interest+principle, so the amount being withdrawn will be more than 2%-3%. 

Because of these limitations, this is not really a "long-term" buy and hold scenario.  The debt has to be paid off 10-15 years, and especially in the beginning years, we can't really afford a "correction."

Should he just pay it off?  Or let the money work?

Thanks all for your input!

taekvideo

  • Bristles
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Re: Leverage? Foreign Lower Mortgage Rate
« Reply #1 on: August 25, 2014, 09:12:41 PM »
It's statistically much better to invest in the market than pay off a low interest mortgage.
It's also a bit riskier, so it depends on how bad a correction would hit you, and whether you could weather the storm.

vagon

  • Stubble
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Re: Leverage? Foreign Lower Mortgage Rate
« Reply #2 on: August 25, 2014, 09:26:05 PM »
Noone can really say how that strategy will play out, but ehres some things to think about:
  • If he owns money in one country and invests in another to service that loan he is carrying currency risk
  • This will also effect his SWR when there's a forex spread on every withdrawl he makes
  • There could also be tax considerations for bringing income back to service the loan
  • The market returns 7% on average, but the variability could be a factor for him depending on his life expectancy.

Another option might be spreading the risk over both - take a smaller mortgage and invest a smaller amount.