As property prices went up since we bought our place and as I only have a 65% mortgage, I now have some room (a six digit figure) to raise my mortgage up to 80% of current value.
My idea was to take this money, invest it long term (talking 15 years). During these 15 years I plan to pay back this extra mortgage via 3a. This way I save about 35% (marginal tax rate) plus the difference between my investment return and the interest rate: long term 7.5% (s&p 500 or VT) - 1% (1.5% for 10 year mortgage - 35% tax saving)…should yield on average 6.5% difference = over 15 years 250% - 100%*0.65 (35 tax saving on 3a) = 180% net profit
One risk that I am aware of is the margin call by the bank if prices drop significantly and my mortgage goes above 80% of the property value. The risk is amplified by the fact that this could happen at a time when stocks are down as well. My hedge against this worst case scenario is my pension fund which has enough withdraw-able part to cover the potential margin call. But I would only withdraw if absolutely necessary.
My thinking with respect to the risk of a margin call is that my risk is still lower than that of someone who buys at today’s prices, since even if stocks do go down I still have at least part of the raised mortgage value (unless stocks go down to 0). My risk is even lower compared to someone who buys at today’s prices and withdraws his pension fund.
So my question is: what you guys think about this idea.
I know people say: don’t invest borrowed money. But isn’t any leveraged investment exactly that? Isn’t buying a house with 80% mortgage an non-diversified investment into the swiss real estate market with 5x leverage using borrowed money?
Thanks for all your opinions,
I know people say: don’t invest borrowed money.
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Usually people (including top economists) discover the problem when the leverage begins to work in the reverse (exactly as you describe with the margin call)…
But isn’t any leveraged investment exactly that?
Sure. And that’s a problem now with the global stock market, after 10 years of +/- interest-free credit…
Isn’t buying a house with 80% mortgage an non-diversified investment into the swiss real estate market with 5x leverage using borrowed money?
Yep. However, you can try to reduce your mortgage: it is a safe investment - of course with a very low rate - but not with borrowed money; plus, your reduce your debt.
Its a bad idea, you might as well sell the house and then invest the money in the stock market. Sounds like a more solid plan to me.
Does your plan make sense if you just go by the numbers: Absolutely. You could even increase your profit by taking up additional margin from your broker, investing in leveraged ETFs etc. etc. and leverage the shit out of everything, if the market goes up you will make a lot lot lot of money, if not - that’s another story. The thing just is, there is an absolute possibility that the stock market might crash and never recover to the current level in your lifetime. What if the real estate market crashes? What if mortgage interest rates go up? Are you willing to risk your pension fund just for the possibility of more profit?
Investing is always risk/reward. Simply saying that it’s a bad idea to invest in the stock market as long as you still have a mortgage to pay is also wrong. If you are not willing to take any risk better not invest in the stock market at all. Even buying a house is a risk.
In the end it’s only you that can decide between risk/reward. Increasing your mortgage for margin is definitely one of the better ways to get margin than plain margin in a broker account. But to me your plan sounds way to much ALL-IN. Why not simply find a good balance between investing in the stock market and paying off your mortgage? It might not be the high-reward choice, but if shit hits the fan you might still have your house and your pension…
Thanks for your well articulated answer.
The ALL-IN inot the stock market analogy is a very good one and does make me think hard about this step.
A middle-ground solution I thought about to find a more balanced approach is to still raise the mortgage but keep it in a savings account (or bonds) only to pay it back via 3a over the next 10 years. I could fix the mortgage to 1.5%. Minus the tax savings, I would pay about 10x1% in interest and save about 30% in taxes due to 3a. That would leave me with 20% net gain.
If interest rates are still low in 10 years, then repeat again with 10x the max 3a for 2 persons= about 135K