The slightly longer answer is that there are two main ways to borrow to invest in stocks.
One is to provide the resulting stock portfolio as collateral for the loan. This is to give the lender access if the debt repayment turns out to be unsuccessful. This is called a “margin loan” and usually comes with the ability to force a bank to sell some of its shares if the portfolio falls below a certain value for the loan. pain.
The second way is to provide your home as collateral for your equity investment loan. Suppose you have a $ 500,000 mortgage on a $ 1 million worth of real estate. You can borrow up to $ 800,000 to maintain an 80% loan-to-valuation ratio (LVR) that doesn’t require you to pay a mortgage insurance to your lender. Therefore, you can apply for a loan of up to $ 300,000 to a bank to invest in stocks.
Some lenders are not keen on the idea, and some lenders condition it. Of course, as always, you have to prove that you have enough income to cover both your living expenses and the cost of paying off your larger debt.
But you can certainly do that. Also, as long as you keep your home loan and investment loan separate, you can claim the shortfall between the cost of equity investment (mainly interest changes) and dividend income at the time of taxation.
When you sell a stock, you get the same 50% discount on the capital gains of the stock if you hold it for more than a year.
understood. Now consider a borrowing alternative for investing in real estate.
Again, you have a $ 1 million real estate with a $ 500,000 existing mortgage.
But now you decide to go buy, for example, $ 500,000 in investment property. You apply for a $ 100,000 loan to your main residence stock as a 20 percent deposit. Borrow the remaining $ 400,000 with a new investment loan.
Banks are willing to do this because they not only have $ 1 million in assets as collateral, but also $ 500,000 in assets (below a certain value, as applied to margins). If you don’t have the corresponding threat of selling) a loan), it means a total asset base of $ 1.5 million.
So a total of $ 1 million in loans is only compatible with 67% of LVRs. Depending on your income and living expenses, you can even apply for more debt to buy more expensive real estate.
And get this. When a bank assesses the ability of an investment property to bear the greater debt, it includes rental income that you may earn in your gross income estimate. Most lenders do not include dividend income in their stock portfolio borrowing conservative testing. In other words, you can reduce borrowing.
In Scenario 1, you can create a stock portfolio of up to $ 300,000. In Scenario 2, you can buy real estate worth more than $ 500,000.
Conclusion: It is easier to increase the amount of assets than stocks and provides a larger initial asset base to enjoy future capital gains (or losses).
I don’t know why banks aren’t so keen on lending to stocks. Over time, both asset classes boast solid returns.
Of course, stocks are a more volatile asset class. Or, at least, it’s easier to see the volatility of daily stock price fluctuations, but home prices are priced accurately only when they are sold.
Perhaps banks are worried that people will do stupid things in their stock portfolios because the transaction costs of stocks are much lower than real estate.
Perhaps the lending attitude will change someday. But for now, that’s what it is.
Of course, you can always combine borrowing to invest in both stocks and real estate.
After running the numbers, my eyes are still fixed on investment real estate. Let’s start hunting …
- The advice provided in this article is general in nature and is not intended to influence the reader’s decisions regarding investment or financial instruments. They should always seek their professional advice, taking into account their personal circumstances, before making financial decisions.
Why can’t you borrow to invest in as many stocks as your property?
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