Author Topic: Balance Transfer Checks as margin / financing  (Read 5025 times)

MustachioedPistachio

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Balance Transfer Checks as margin / financing
« on: April 29, 2015, 03:18:36 PM »
If there is already a thread on this specifically, would someone please direct me? Tried searching and scanning the threads and didn't find anything conspicuous.

I'd love to hear if and how some of the riskier folks here are using this "nearly free*" money source to lever investments, as well as anyone using them to conduct rate arbitrage or even capitalize a business. What is your rationale? When would you use them, if at all? Any constructive admonition beyond "risk-adjusted return!!!"?

There are several experiences I'd like to share to get the discussion rolling:

0. First, I'd like to explain balance transfer checks (BTCs) as I've experienced them. We are interested in the ones you can actually cash / send money to yourself. So, CC Company XYZ either mails a physical check or emails you an offer with certain promotional rates. Sometimes there are two options: 0% APR with a transaction fee (1-5% of transfer) or 0% transaction fee with low APR (lowest I've seen is 5.99%).  The transaction fee is charged to the credit card and "rolled into" the loan amount. There are minimum payments due every month of around 2% of the balance (YMMV). The huge catch is, if you make a purchase after the BTC posts to your account, the whole balance is treated as a regular purchase. BTCs should only be reserved for CCs that can be locked up for a while. Anyway, moving along.

1. My first foray into using BTCs was incredibly, stupidly risky. I used the funds to lever an investment I was already long in - stock in ONE small-cap technology company. Doh! Fortunately, I came out ahead, but risk-adjusted returns were piss poor. Using the sales proceeds, I promptly paid back the transfer amount and pocketed the short-term gain (ouch again).

2. After wising up and switching to all low-cost index funds, another BTC came along. It was a 0%er, 3% transaction fee for 18 months, equivalent to 2% APR prepaid interest. Hmmm...we just bought a house...3.625% interest rate...I could use this to make a fat principal payment and benefit from rate arbitrage (the difference between BTC rate and the mortgage rate). I will save 1/17th of the CC balance each month in my high-yield savings and pay back the transfer when it comes to the end of the promotional period! Interest saved on mortgage + interested earned on sinking fund > BT fee. Win-win, right? Right? Well, I dug a little deeper.

If I were going to pay down my mortgage anyway, I would have been better off just paying the damn thing down with what I would need to save each month to pay back the BTC (see attached). If the mortgage rate were higher, there would be some value in using the BTC. If the mortgage was at least 2 years old, and I wasn't already at or below 80% LTV, the BTC could help eliminate several PMI payments, thereby significantly improving its value if I didn't plan on using savings to accomplish any of this in the first place. And there, my friends, is the key.

Every last red cent of my monthly residual savings is dumped into equities. I'm a recent convert to the "keep the mortgage" club (thanks arebelspy et al!). Yes, I would take out a HELOC and invest it. So, if I plan on keeping the mortgage to turbocharge my investments, why would I curtail that US-dollar-shorting, inflation-hedging money parade with additional cash, let alone a BTC? Moreover, one has to generate the cash flow to cover not only the minimum monthly payments but also enough to cover the total amount when due. You can't "cash out" part of the house to do this. Plus there's the opportunity cost of missed investment returns from the sinking fund. I suppose you could invest that, too...but...yikes. Rate arbitrage on a mortgage isn't the best idea. There is no other debt (as it should be!) to deploy this strategy against, which leads me to...

3. Resuming the BTC examples, here's what I actually did with that opportunity from #2 - I maxed out my IRA and part of my wife's. The cash flow kink is still an issue, as I can't feasibly pull out money from the IRAs, but the destination of the set-aside funds would be equities nevertheless; I simply accelerated the savings process. My rationale: front-loading our tax-deferred accounts will likely yield a sufficiently greater return (67 - 75% chance!) than dollar cost averaging as the funds became sporadically available, which should more than offset the incurred interest expense. I ran some numbers based on 7% nominal returns and strategically timed sinking fund additions and there's a decent amount of accretion due to the BTC method.



Examples #2 and #3 are obviously less risky than #1. There's collateral being chucked toward the obligation. The principal is conserved via the sinking fund. I'm damned hesitant to repeat #1 as 100% levered, even in muni-bond index funds where after-tax yields are highly probable to beat out the 2% from the BTC and principal will (most likely) remain intact. 18-24 months isn't nearly a long enough period to ride out the volatility and cash out on top before the balance is due. Risk-adjusted returns need to be significant to justify this undertaking / huge mistake.

Unless... I started a BT ladder...... :)

Thoughts, beefs, success stories, horror stories, hacks? Should we even bother with these?



*The 0% APR, low-to-no transaction fee, longer promotional period sort. I have seen one through First National Bank of Omaha that offered 5.99% APR for "the life of loan"...I couldn't find how long it would live in the small print...but something like that could prove useful for financing a business venture rather than working interest rate voodoo. Sure cheaper than equity, but it largely depends on the cash flow requirements. I considered this for springboarding my wife's photography business! Things worked out differently however. Wow what a tangential footnote.

bigchrisb

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Re: Balance Transfer Checks as margin / financing
« Reply #1 on: April 29, 2015, 03:34:14 PM »
Have a read of my journal (I think about page 3). I got very aggressive with balance transfers in 07/08, first interest rate arbitrage and later as leverage into stocks. Needless to say the gfc served me my just desserts. I dug myself out, but the experience cost me about 50k.
Oh hindsight!

MustachioedPistachio

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Re: Balance Transfer Checks as margin / financing
« Reply #2 on: April 29, 2015, 03:35:34 PM »
Woah, man bigchrisb!! I'm heading over that way now...

Captain_Burrito_Pants

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Re: Balance Transfer Checks as margin / financing
« Reply #3 on: April 29, 2015, 03:40:57 PM »
Why not just get a margin loan at Interactive Brokers at about 1.6%


phillyvalue

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Re: Balance Transfer Checks as margin / financing
« Reply #4 on: April 29, 2015, 04:50:16 PM »
You don't want to invest with balance transfer checks. This sets up a huge disconnect in the duration of assets and liabilities. The longest BTC you are going to find may be 18 months or 2 years, versus investing in stocks should be seen as a minimum 5-10+ year commitment IMO.

Considering any interest rate and transfer fee, using BTC to payoff a mortgage is very unlikely to be accretive. If you have a 4% interest rate and are facing 30% marginal tax rate, that's an effective 2.8%. Maybe you get a golden BTC and it's 0% for 18-24 months with a 2% fee or something, but even then it's probably not worth it.

The only good usage of these is to payoff higher rate debt, so if you have other credit card debt. I worked with my parents to utilize a longer-term BTC at a low rate in order to consolidate several credit cards they have. But for those of us w/o CC debt they have limited usage.

MustachioedPistachio

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Re: Balance Transfer Checks as margin / financing
« Reply #5 on: April 29, 2015, 05:21:00 PM »
Captain Burrito, could you elaborate, please?

Thanks phillyvalue. That makes total sense. The disconnect on the duration is what's turning me off for using these for stocks/bonds. Disregarding the duration is straight up gambling. Unless I can find a CD or savings account that pays >2% or whatever the fee is, it's an poor route to take. Even then, is it worth the time to make an extra 1/2 point or one? Meh.

FWIW, our RE taxes, mortgage insurance, and imputed sales tax don't come close to the MFJ standard deduction, so no tax perks there.

I'd consider using them for cheap start-up capital if we decide to launch a business, but hell by then we'll likely have enough to get us going sans debt. From there, SBA loan if we wanted to leverage.

forummm

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Re: Balance Transfer Checks as margin / financing
« Reply #6 on: April 29, 2015, 06:11:46 PM »
Captain Burrito, could you elaborate, please?

Interactive Brokers has margin loans for 1.6%. Standard. Just have a margin account there. Rates are tied to LIBOR (which isn't going up much in the short term).

Be careful with leverage though. The market is pretty expensive now. Leverage with your mortgage (long-term time horizon with a fixed rate, non-callable loan) is one thing. Borrowing with a short-term, variable-rate, callable loan is another.

GGNoob

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Re: Balance Transfer Checks as margin / financing
« Reply #7 on: April 29, 2015, 06:57:54 PM »
I've considered doing this for Lending Club and I know somebody over at the Lend Academy forums has done it in the past. I could write myself a check for $10k at 0% for 14 months with a 3% fee. Assuming I get an after tax return of about 9%, I'd come out ahead. Now before that money is due, I could sell notes to get the cash to pay it off or I can pay it off with money from another source. Otherwise, I can just write myself another 0% check and keep the money invested.

forummm

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Re: Balance Transfer Checks as margin / financing
« Reply #8 on: April 29, 2015, 07:15:17 PM »
I've considered doing this for Lending Club and I know somebody over at the Lend Academy forums has done it in the past. I could write myself a check for $10k at 0% for 14 months with a 3% fee. Assuming I get an after tax return of about 9%, I'd come out ahead. Now before that money is due, I could sell notes to get the cash to pay it off or I can pay it off with money from another source. Otherwise, I can just write myself another 0% check and keep the money invested.

I thought about Lending Club too. What do you think the risks are if we have another huge recession? Losing half your investment there? Not every recession is going to be 2008. But people were defaulting on debts all over the place. And Lending Club borrowers are by definition more risky.

GGNoob

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Re: Balance Transfer Checks as margin / financing
« Reply #9 on: April 29, 2015, 07:29:11 PM »
I've considered doing this for Lending Club and I know somebody over at the Lend Academy forums has done it in the past. I could write myself a check for $10k at 0% for 14 months with a 3% fee. Assuming I get an after tax return of about 9%, I'd come out ahead. Now before that money is due, I could sell notes to get the cash to pay it off or I can pay it off with money from another source. Otherwise, I can just write myself another 0% check and keep the money invested.

I thought about Lending Club too. What do you think the risks are if we have another huge recession? Losing half your investment there? Not every recession is going to be 2008. But people were defaulting on debts all over the place. And Lending Club borrowers are by definition more risky.

Ya, that is certainly the biggest risk, especially since I'd be investing in the lower grade notes.

tmoney

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Re: Balance Transfer Checks as margin / financing
« Reply #10 on: April 29, 2015, 07:34:25 PM »
I am using this same thing to finance my business setup. It's for tenant improvements and fixtures. I have tried regular bank loans and all say find a rich relative, a home equity line or credit cards. Really a banker told me that today. I have 15k cash advance check available. I plan to pay off within 12 months but have 18 months. It's a risk but I am pretty confident it will be okay. 

sirdoug007

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Re: Balance Transfer Checks as margin / financing
« Reply #11 on: April 30, 2015, 10:30:40 AM »
Why not just get a margin loan at Interactive Brokers at about 1.6%

Because BTCs are non-callable.  They are on a short schedule though which, as mentioned, is not ideal for equity investments.

I would only do this if I could find a CD or savings account to arbitrage.

theoverlook

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Re: Balance Transfer Checks as margin / financing
« Reply #12 on: April 30, 2015, 11:19:30 AM »
I think balance transfer checks can be a very useful tool for short term financing of unusual things.  I used them to purchase empty land once and it saved me a ton of money over getting a mortgage on the land.  I've used them for a cash flow boost in a successful but cash strapped business.  But using them to purchase stocks doesn't seem like a good application.

forummm

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Re: Balance Transfer Checks as margin / financing
« Reply #13 on: April 30, 2015, 11:53:48 AM »
Why not just get a margin loan at Interactive Brokers at about 1.6%

Because BTCs are non-callable.  They are on a short schedule though which, as mentioned, is not ideal for equity investments.

I would only do this if I could find a CD or savings account to arbitrage.

A margin loan is only callable if you are leveraging too much. I hope you aren't borrowing $15k on a credit card with $3k net worth. If you have $100k in your portfolio and borrow $30k on margin, the market would have to drop over 75% before your loan was called--which would mean you just add some cash to the account. You'd have a lot of time to be aware that the market was tanking and to add more cash.

NoraLenderbee

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Re: Balance Transfer Checks as margin / financing
« Reply #14 on: April 30, 2015, 12:17:26 PM »

I thought about Lending Club too. What do you think the risks are if we have another huge recession? Losing half your investment there? Not every recession is going to be 2008. But people were defaulting on debts all over the place. And Lending Club borrowers are by definition more risky.

If people lose their jobs or have other financial problems, paying their Lending Club loan will be at the bottom of their priority list, way after rent/mortgage, food, heat, phone, car payment, etc. I started doing P2P lending in 2007. A *lot* of borrowers who had paid consistently for 1-2 years fell apart after the recession began. If you don't mind being last in line to get paid (and often not getting paid at all), go ahead. I don't recommend it for anything except gambling money.
« Last Edit: April 30, 2015, 04:39:08 PM by NoraLenderbee »

innerscorecard

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Re: Balance Transfer Checks as margin / financing
« Reply #15 on: April 30, 2015, 04:04:53 PM »
You don't want to invest with balance transfer checks. This sets up a huge disconnect in the duration of assets and liabilities. The longest BTC you are going to find may be 18 months or 2 years, versus investing in stocks should be seen as a minimum 5-10+ year commitment IMO.

This is exactly right. Investing in stocks, even though the asset class has a X% (whatever the type of stock) "projected" return going forward, isn't like putting money into a bank account that gives you X% interest. That's a common mistake many people starting out make.

You introduce a risk of ruin by doing this, when there's no need to do this.