Author Topic: Borrowing 30k at 2.45% over 10years for investing?  (Read 1206 times)

BobTheBuilder

  • Stubble
  • **
  • Posts: 180
Borrowing 30k at 2.45% over 10years for investing?
« on: August 10, 2019, 02:22:50 PM »
Hi folks,

the yield on 10 year bonds has become so low in Germany, that banks are lending now at 2.45% for 10 years, if you take AT LEAST 30,000Ä (up to 50,000) and of course have the credit score to do. You can throw extra principal on the debt whenever you like (like 99% of the remaining sum) without additional charges.

There is one main risk to doing so: losing your own job during the industrial recession (which we already have). I will go for salary negotiations in a few months, and get a better feeling for the situation (r&d department, but we feel the cost cuttings, too). So I might borrow fixed and invest before the year ends, if all goes well.

So my question to you would be: Would you lend 30k and, over a time of 120 months, pay back ~33,810 Ä with 282Ä each month for broad index investing all over the world?

Montecarlo

  • Bristles
  • ***
  • Posts: 318
Re: Borrowing 30k at 2.45% over 10years for investing?
« Reply #1 on: August 10, 2019, 04:11:38 PM »
If your future income stream is safe enough (which you are suggesting it may not be), all you are doing is frontloading your investments instead of cost averaging over the next decade.  Itís not a horrible plan if you recognize the SORR you are taking and are prepared to handle volatility.


Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 4628
  • Age: 11
  • Location: UTC-10:00
Re: Borrowing 30k at 2.45% over 10years for investing?
« Reply #2 on: August 10, 2019, 05:10:23 PM »
What will you be investing in?

reeshau

  • Pencil Stache
  • ****
  • Posts: 718
  • Location: Dublin, Ireland
Re: Borrowing 30k at 2.45% over 10years for investing?
« Reply #3 on: August 11, 2019, 03:47:53 AM »
You seem to understand the risk, so to me it would depend on the reward.  I'm not thinking in terms of rate of return, but rather in terms of your assets and your retirement date.  Is this your first Ä30,000?  Do you already have Ä1,000,000 saved?  I would say that this could be OK, if it is meaningfully changing either your expected retirement date or the standard of living you will have when you retire.  So, if you are behind in savings, and this could put you on track, it might be worthwhile.  (and in this case, you would likely be behind in savings, but have a relatively high income, so you can afford the payments without redirecting your savings to it)

But if you already have significant savings, or are close to your retirement date anyway, I wouldn't bother.  While there is money to be made in such arbitrage, you may already have "enough," and while the risk is low, the bad outcome is the only outcome that would be meaningful to you.  There is no need to get fancy if you do not need it.

BobTheBuilder

  • Stubble
  • **
  • Posts: 180
Re: Borrowing 30k at 2.45% over 10years for investing?
« Reply #4 on: August 11, 2019, 04:01:56 AM »
Hey Paul,
allocation as planned for 2020:

15% Pacific exJapan (Blend)
15% EM (Blend)
15% S&P 600 (MidCap)
15% Nasdaq 100 (Blend/Large Growth)
15% EuroStoxx 600 (MidCap)
15% Pharma/Biotech ETF (big ones and newcomers)
10% Gold/Short Term Treasuries

One might argue for going 20/20 on the US allocation and reduce EM and EuroStoxx by 5 points each. Pharma and Biotech span the old and new world.

Like Montecarlo said, if I managed to get a pay raise in around Oct/Nov, I will treat my job as secure. BTW what do you mean by SORR?

Reeshau has some good points. My net worth is about 11k as we write. SO and I are full time earners with combined 69k after taxes, no dependents. My savings rate is approx. 40%. I have 5k@ 3.3% open from student loan programs, which I would pay off with the lower interest debt (no big deal at that balance though). We rent our apartment.

To put some numbers to this endeavour in terms of risk and reward, I will try to simulate the outcomes with Python :-)

PDXTabs

  • Handlebar Stache
  • *****
  • Posts: 1328
  • Age: 36
  • Location: Portland, OR, USA
Re: Borrowing 30k at 2.45% over 10years for investing?
« Reply #5 on: August 11, 2019, 10:27:12 AM »
My net worth is about 11k as we write. SO and I are full time earners with combined 69k after taxes, no dependents. My savings rate is approx. 40%. I have 5k@ 3.3% open
from student loan programs, which I would pay off with the lower interest debt (no big deal at that balance though). We rent our apartment.

On paper, this seems like a good deal. Take the loan, pay off the student loan, invest the rest. What are the odds that you can't make the payments or pay back the loan? What's the worst that can happen?

Montecarlo

  • Bristles
  • ***
  • Posts: 318
Re: Borrowing 30k at 2.45% over 10years for investing?
« Reply #6 on: August 11, 2019, 11:56:38 AM »
Like Montecarlo said, if I managed to get a pay raise in around Oct/Nov, I will treat my job as secure. BTW what do you mean by SORR?

Sequence of return risk.

Scenario #1: You put 30K in the stock market.  It goes up 100% and then drops 50%
Scenario #2: You put 30K in the stock market.  It goes down 50% and then doubles.

In both cases you end up with 30K.  But if you are adding money into the market every paycheck, or if you are withdrawing money regularly for retirement, the order (or sequence does matter).

So in a way, by pulling your investing forward, you are mitigating SORR.

You should probably consider a couple of scenarios when making your decision:
#1: Market has an immediate and severe correction, and subsequent recovery
#2: Market continues appreciating at an average pace
Run those two for both pulling it forward, and for cost averaging in from your regular paycheck.

Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 4628
  • Age: 11
  • Location: UTC-10:00
Re: Borrowing 30k at 2.45% over 10years for investing?
« Reply #7 on: August 11, 2019, 01:53:16 PM »
Is this the best offer you can find? I found this handy page:
https://thebanks.eu/compare-banking-products/consumer-loans/Germany

Here is an appealing one:
https://www.1822direkt.de/lp-ratenkredit/ at 1.74% over 84 months.

I suspect there are others, but my German is rusty, maybe I'm misunderstanding some of the conditions.

BobTheBuilder

  • Stubble
  • **
  • Posts: 180
Re: Borrowing 30k at 2.45% over 10years for investing?
« Reply #8 on: August 11, 2019, 02:41:57 PM »
Thanks for the input, Montecarlo. Will compute that!

Paul is right, there seem to be even better offers on the market for 7 year terms. Good catch. There is a law in the EU that forces banks to mention the rate they give to the top 2/3 of the credit score continuum. But with SWK and 1822 there is in the small print that this is not the offer they give to this to 66%, but probably only the best 10% or so. Meaning I could poll them, but our credit system also gives you bad credit if you make a serious inquiry several times in a row without closing "cause that looks fishy...". So the first time it better goes through.

So the takeaway is for now: Not the worst idea, but check for SORR in case Mr. Market drops significantly, and make sure I don't lose my job. Which would be a first for me, I was never unemployed, not even during the GFC as a student worker. Than find the best possible loan terms and front load the investments.


Classical_Liberal

  • Handlebar Stache
  • *****
  • Posts: 1151
  • Age: 43
Re: Borrowing 30k at 2.45% over 10years for investing?
« Reply #9 on: August 12, 2019, 12:29:14 AM »
Don't do it

h82goslw

  • Stubble
  • **
  • Posts: 184
Re: Borrowing 30k at 2.45% over 10years for investing?
« Reply #10 on: August 12, 2019, 09:32:34 AM »


Like Montecarlo said, if I managed to get a pay raise in around Oct/Nov, I will treat my job as secure. BTW what do you mean by SORR?

If youíre not familiar with Sequence of Return Risk Iím going to guess you probably donít know enough about investing to start leveraging assets in the hopes of beating average market returns.  Add to that that youíre not considering your job secure until/if you get a raise later this year? 
Thatís a lot of risk.
Some other folks here have made some really good suggestions about investing in TSM.  I would heed their advice.

BobTheBuilder

  • Stubble
  • **
  • Posts: 180
Re: Borrowing 30k at 2.45% over 10years for investing?
« Reply #11 on: August 12, 2019, 11:20:55 AM »


Like Montecarlo said, if I managed to get a pay raise in around Oct/Nov, I will treat my job as secure. BTW what do you mean by SORR?

If youíre not familiar with Sequence of Return Risk Iím going to guess you probably donít know enough about investing to start leveraging assets in the hopes of beating average market returns. Add to that that youíre not considering your job secure until/if you get a raise later this year? 
Thatís a lot of risk.
Some other folks here have made some really good suggestions about investing in TSM.  I would heed their advice.

Thanks for the input, I appreciate your concern. I am familiar with Sequence of Return Risk, just did not know the abbreviation SORR for it. Regarding job security: I am without reasonable doubt I will have a job that pays more or less what I make now for the foreseeable future. The pay raise would imply that the company would not cut back on R&D budget, and I am important to them. If there are budget constraints, I might have trouble getting the raise or I might get the raise on an hourly base but end up with fewer working hours (I am currently on paid permanent overtime, 40 hours instead of 35).
If I get the raise and keep the full hours, I could increase my savings by several hundres per months and probably go ahead.
Same paycheck => not going ahead. Only 35 hour instead of 40 hours and no raise => not going ahead, looking for other ways to increase income. Just thinking out loud and being cautious of course. BTW if you lose your job in Germany, you get 62% of your last after tax pay for up to 12 months. Every employed person has to contribute to job loss insurance. And that 62% matches my savings rate.