Author Topic: Apply leverage? 4% real interest for 8 years  (Read 4673 times)

DaKini

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Apply leverage? 4% real interest for 8 years
« on: August 07, 2014, 01:55:37 AM »
Hi there,
currently i have probably the option to take on a loan at 4% real (effective) interest. The caveat is that the payment plan is fixed to 8 years.
The ammount is about 5k so the monthly total payment is about 730. The only option to invest would be to take the money and put it into my overall portfolio of 80% stocks.

Would you do it?
I am a little scared to do this since the payback timeframe is rahter short for this kind of investment.
What are the risks of this game, besides that it wont pay off at year 8 and i end up with shares worth less than i paid for? How is this scenario to be viewed in the long run?

TomTX

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Re: Apply leverage? 4% real interest for 8 years
« Reply #1 on: August 07, 2014, 05:40:13 AM »
Real interest? You mean something like LIBOR + 4%? LIBOR is something like 0.6%, so you're talking 4.6%, with the chance it will go UP.

If so, I wouldn't bother. Not worth the risk. Heck, it's not worth the hassle even if it's 4% fixed (imo) due to the small amount.

Around here, the recent rule of thumb has generally been "pay off debts 5% or higher, then invest" because you can expect over the long term to make more in the US stock market than the interest.

For example, my mortgage is 2.5%, fixed for another 7 years. That's cheap money, half of what the "rule of thumb" would be. Lots of margin.  Therefore, I feel no inclination to pay off the mortgage any faster than I have to.

Finally, your payoff schedule is whacky. Did you mean 73/month, not 730? Or did you mean a 50k loan, not 5k?

soccerluvof4

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Re: Apply leverage? 4% real interest for 8 years
« Reply #2 on: August 07, 2014, 07:14:44 AM »
Real interest? You mean something like LIBOR + 4%? LIBOR is something like 0.6%, so you're talking 4.6%, with the chance it will go UP.

If so, I wouldn't bother. Not worth the risk. Heck, it's not worth the hassle even if it's 4% fixed (imo) due to the small amount.

Around here, the recent rule of thumb has generally been "pay off debts 5% or higher, then invest" because you can expect over the long term to make more in the US stock market than the interest.

For example, my mortgage is 2.5%, fixed for another 7 years. That's cheap money, half of what the "rule of thumb" would be. Lots of margin.  Therefore, I feel no inclination to pay off the mortgage any faster than I have to.

Finally, your payoff schedule is whacky. Did you mean 73/month, not 730? Or did you mean a 50k loan, not 5k?


+1   Totally agree with TomTX here.

kyleaaa

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Re: Apply leverage? 4% real interest for 8 years
« Reply #3 on: August 07, 2014, 08:16:36 AM »
No way. Not at that rate and not over that time-frame.

DaKini

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Re: Apply leverage? 4% real interest for 8 years
« Reply #4 on: August 08, 2014, 03:59:08 AM »
Thank you very much; then my gut feeling was probably right.
Btw i was talking about 5k and about 3.98% nominal fixed; so its about 75 per month.

arebelspy

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Re: Apply leverage? 4% real interest for 8 years
« Reply #5 on: August 30, 2014, 10:22:42 PM »
Meh, borrowing at 4% to buy stocks over a short timeframe.  Probably not, personally, but it depends on your goals and risk tolerance.
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dachs

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Re: Apply leverage? 4% real interest for 8 years
« Reply #6 on: December 29, 2014, 03:07:55 AM »
I was thinking about this topic as well and I think you got the numbers wrong!

If you borrow 5k over 96 months your monthly payment would be something like 68 ( and that's a rather expensive rate).

So after 8 years you'd have spent 6528 on your investment. That means that your initial investment should return 3,39% per year annualised for 8 years, which is below the average of most indexes. And I've seen 10year loans with lower interest rates.

With your numbers: 5k, 4% real effective (or however you'd call it) means that you paid 5.834,88 for the initial 5k. So if the index returns more than 1,95% per year annualised you made money.

Thinking about that I don't understand why you wouldn't take that chance unless you expect a long downswing of the stockmarket or might not be able to pay the low payment each month during those 8 years. I calculated a similar example with the Stoxx Europe 600 net return index with a 10year loan. The result was that, unless you invested all the money between 1999 and 2002 (huge crash), you got a way better result than saving the same monthly rate and invest it every year.

Edit: Just noticed you corrected the monthly payment to 75 so it would be like I wrote here. What are you guys opinions on those numbers?
« Last Edit: December 29, 2014, 03:16:07 AM by dachs »

josstache

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Re: Apply leverage? 4% real interest for 8 years
« Reply #7 on: December 29, 2014, 04:56:59 AM »
Where I live, one can get a 10 year mortgage for 1.5% interest or less, so 8 years at (4% + X%) would be quite bad.  It partly depends on what interest rates are like in your area.

dachs

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Re: Apply leverage? 4% real interest for 8 years
« Reply #8 on: December 29, 2014, 05:22:51 AM »
True, but with a mortgage the house is your security for the bank. The mentioned interest rates here are without securities, they'll just want to see your income. I'm not sure if you can negotiate the interest rate if you tell them that you want to buy stocks with the money ;)

SpicyMcHaggus

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Re: Apply leverage? 4% real interest for 8 years
« Reply #9 on: December 29, 2014, 04:07:31 PM »
I apply leverage at 1.6%
any more than that and i pass.
The dividend from stocks i buy often covers the leverage cost.

BlueHouse

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Re: Apply leverage? 4% real interest for 8 years
« Reply #10 on: December 30, 2014, 01:47:19 PM »
no way.  You've heard the old adage:  only invest what you can afford to lose.  If you have to borrow money to invest it, then you cannot afford it. 
Yes, I do see this as a different type of borrowing than a mortgage and not prepaying your mortgage. 

shotgunwilly

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Re: Apply leverage? 4% real interest for 8 years
« Reply #11 on: December 30, 2014, 02:11:53 PM »
no way.  You've heard the old adage:  only invest what you can afford to lose.  If you have to borrow money to invest it, then you cannot afford it. 
Yes, I do see this as a different type of borrowing than a mortgage and not prepaying your mortgage.

I thought that was "gamble"?

SpicyMcHaggus

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Re: Apply leverage? 4% real interest for 8 years
« Reply #12 on: December 30, 2014, 02:32:08 PM »
no way.  You've heard the old adage:  only invest what you can afford to lose.  If you have to borrow money to invest it, then you cannot afford it. 
Yes, I do see this as a different type of borrowing than a mortgage and not prepaying your mortgage.

Investing is a bit of a gamble.
If you could average 4.5% return annually, and someone was willing to loan you money at less than that rate, you would be silly not to right?
Of course the market doesn't always go up 4.5%. Sometimes it tanks. Sometimes it spikes. That's the gamble. On a long enough timeframe, investing on margin is smart.