Five Key Things to Consider When Borrowing to Invest
July 6, 2016 | Posted by: Calum Ross
With interest rates at near all time lows and a number of the global investment and real estate markets showing strong return numbers – borrowing to invest has never been more popular. Using home equity to access cheap money can be a great way to get a jump start on your investment portfolio – it does carry more risk. So while borrowing to invest can be a great way to build wealth – it is not for everyone!
Here are five key things to consider when using borrowing to invest to build your wealth:
1. Psychological/Financial Risk Tolerance – simply put – if you can’t tolerate the ups and downs of investing (financially and psychologically) then don’t borrow to invest. Real estate and investment markets do go up and down and you have to be mentally and financially comfortable with the worst case scenario.
2. Hold cycle – if you don’t have a long time horizon (likely a minimum of five years) then don’t get in the game. When you may have to cash in early due to liquidity then this is not a suitable strategy for you.
3. Interest rates – what are the current mortgage rates? Is your rate variable or fixed for the term of the investment? Don’t rely on the math of short term borrowing if you need it to make the numbers work in the longer term. Always remember it’s actually the after tax cost of borrowing that matters so watch this number not the face rate of interest when running the math.
4. Rates of return – what are the expected and minimum rates of return? Like the cost of borrowing, it’s the after tax rate of return that matters. Your after tax rate of return must be greater than your after tax cost of borrowing or the financial math simply doesn’t make sense for you to move ahead.
5. Making payments on the mortgage – does your budget (or balance sheet) have enough flexibility that you can you afford to make the payments on time even on your low income months? If you don’t have room in your debt servicing with a financial cushion, then wait until you do.
If you want to deal with a team who has handled more borrowing to invest business than any other mortgage professional in the nation – we would love to help.
Call us today at 416-410-9905 – we can show you how do this conservatively and profitably!