Mortgage a fully paid home and invest the money?

I have always been rather reluctant to borrow. Some might laugh at me for not taking advantage of "good debt" but I believe all of us have different levels of tolerance for debt. It is almost like a religion. It is very personal.

Indecent? Lewd? Maybe, to some.

Here is an email exchange with a reader on the issue:

Hi AK,

Love your thought process and your discipline and I was hoping you can give me your opinion.

Recently I have been toying with the idea of putting my name on my parent's property (1%) which will allow me to take a loan of up to 2 million based on my current income at a current interest rate of 1.4%.

The proceeds of the mortgage is purely for investment purposes.  One reason for doing this, is that I am thinking of leaving my current job, meaning that the option for a "cheap loan" (i am not referring to the interest rate but rather a mortgage backed loan) for none property related investments. Apart from the risk of making poor investments and losing all your money while still owing the bank money blah blah, what are the risks that you see?

As background, I have 750k in various asset classes ranging from cash to shares to foreign property and no outstanding loan. Looking to retire in the next 5 years!

Happy if you want to share this as a post but don't put my name!

Cheers,
H

AK's reply:

Hi H,

Depending on your personal consumption level and the productiveness of your assets, $750K worth of assets could possibly provide a rather comfortable retirement income. So, I would question if there is actually a need to mortgage a fully paid up property to fund more investments.

This was something offered by my banker as well a few years ago. However, being very conservative when it comes to using debt, I chose not to do it. On hindsight, I could have made more money if I did it but I wonder if the feeling of unease which I am sure I would have had would be worth it. It is rather personal.

The question on the possible risks apart from the ones that you are already aware of is very wide. I definitely cannot see all the risks but if we are of the opinion that interest rates cannot possibly go lower, then, we must expect finance cost to rise. We might want to question whether the expected returns on our investments will be able to rise in tandem.

Also, we want to bear in mind that rising interest rates are not good for real estate owners, usually. The much higher asset prices today is mostly due to the abnormally low interest rate environment in recent years.

We could see real estate prices declining as interest rates rise. It would probably affect the valuation of your mortgage property and this, as you can imagine, could create an issue. Of course, depending on the property's characteristics, it could be affected more or less. It is hard to say for sure.

I will share our email exchange in my blog to see if others have thoughts to share. I will make sure not to include your name. ;)

Best wishes,
AK

We welcome other perspectives on the matter as well. So, please feel free to leave a comment.

Related posts:
1. Good debt is always good?
2. To rent or to buy: Rule of 15.
3. Gear up and receive more passive income?

Should I have just left my money in fixed deposits?

This blog post is a reply to a comment made by a reader, pf.

Read pf's comment: here.

Hi pf,

Actually, some time ago, that was what someone told me too. I have provided the link to the related post at the end of this blog post, if you are interested in reading the story.

We can make money from stocks in one of two ways, capital gains and dividends.

So, although I like to say that entry prices are important because that has a bearing on future capital gains and also dividend yields, if we had paid a fair price for a good business, we should do OK too in the longer run. Yes, longer run.

In the longer run, we might not do as well by way of capital gains but if the stock pays regular and meaningful dividends out of its earnings, we will still do quite well over time.

However, if we should need the money for specific purposes in the near future and are forced to liquidate, then, we could end up losing some money if Mr. Market should be feeling depressed at that point in time. So, it is important not to use money earmarked for specific purposes in the near future for investing in equities.

After many years of struggle, I like to think that I have found my way and I am glad to say that my current home will be fully funded by capital gains and dividends paid to me by Mr. Market.

Some money are best left in FDs and some money should be in equities. Once we have sorted this out, we should do better.

Related post:
To be richer, be comfortable with being invested.