Sadly I did consider it briefly
The bank I have my mortgage with sent me the flyer above for the second time this week.
Basically it introduces a multi-purpose loan the bank is offering. The conditions are floating rate (currently 2.3%), can borrow up to 10 million yen for up to ten years, and the money can be used for any purpose (although borrowing to invest is technically not allowed).
There is a special version for public servants, in that if you check various boxes (have the bank credit card, pay your bills through their account, etc.) they will reduce the interest rate by up to 0.6%.
Idle thoughts
This was the second time I have seen this flyer, and once again I started thinking about using it to boost my portfolio.
If I could borrow 10 million yen at 1.7% for ten years, I could for example buy ten dividend paying stocks with an average yield of 4-5%. This would comfortably cover the interest on the loan, with the possibility of some capital gains on the side.
Ten million is about two years of investments for my wife and I (we currently save most of our income), so this would mildly accelerate our progress rather than changing it drastically.
Cold reality
In my initial daydreaming I kind of forgot about repaying the principal 🙂
While the annual interest would be about 170,000 yen, the monthly repayment would be something like 100,000 yen, and after taxes we might optimistically expect 300,000 yen or so of dividends per year, leaving 900,000 yen of principal repayments to be made. Hmm. Not quite as fun as I initially thought.
Paying back the principal by selling stocks assumes the prices will not fall, something that is likely to happen at some point over the next ten years (we’ve had a huge bull run on stocks for the last few years).
There are also fees that need to be paid when taking out a loan, and painful amounts of paperwork. Not my most favourite thing. In fact, my mortgage application paperwork almost broke me -I had to write my full name and address approximately sixty-seven times during the application process. This is sadly not much of an exaggeration!
Adding another loan (at a relatively high rate of interest -at least for Japan) to our current financial commitments would push our monthly baseline a lot higher than it is now. Fixed spending (money you have to pay regularly) can be dangerous if your income falls or you have unexpected expenses.
In the end
I threw the flyer in the paper recycling after taking the photo above.
Borrowing to invest could potentially accelerate our progress towards meeting our monthly needs with passive income, but it could also turn into a huge, expensive, time-consuming mess.
At the end of the day I would rather spend another couple of years working and saving to avoid the hassle, risk, and excitement of this ‘opportunity’.
What yen stocks yield 4-5%? I think you’d have to convert to USD or some other foreign currency and then you’d run FX risk. Not worth doing for an extra $3-4k per year.
Yeah, I was looking at US-listed stocks. Completely agree 🙂
I would be pretty tempted if this offer came in front of me. I doubt I’d borrow the full 10 million for reasons mentioned above. I’ve already stopped making extra payments on my home loan so I can invest more though.
Investing is the only reason to borrow. If you can’t make get more value out of the cost of the loan principle + interest, you shouldn’t take the loan. 😉
But… borrowing to gamble is a terrible idea. Finding the line between gambling and investing is never easy. I don’t think I’d borrow money to invest in securities. Your own accomodation, education, starting a business, etc. seem like more worthy causes – they’re either things you need, or have direct control over.
Stephen Graham on YouTube just released a video on this very topic titled “Why I’m $1.8 million in debt” Once you get past the clickbait title it was actually a very informative video.
I confess to having borrowed money to invest. Actually, I wanted to capture the f/x rate when the yen was below 80 to the dollar. I borrowed from my school’s mutual aid association, so no bank involved–just a brief talk with the personnel office. Unfortunately, it took about two months for the funds to come thru, so I didn’t get the ultimate best rate, but in retrospect it was good enough, and I did end up investing with it.
Remember that some traders do use margin accounts, along with puts and calls, via which you effectively put more money on the line than you have. If you’re feeling brave, the US market has ETFs designed to double or triple the up/down moves of a given index or group. (And many if not most of Pimco’s closed-end funds (CEFs) are leveraged, if you want someone else to do the betting for you.)
Some CEFs are leveraged, but such funds invest in a whole range of assets or debts often over multiple sectors and currencies, and have long histories (for example, from before the 2007/8 crash), so the risk is not bad.
I think you made the right decision.
There was a time I used a fair amount of margin in my brokerage accounts –even surviving the 1999-2000 internet bubble without losing my shirt– but seeing how bad the Great Recession hurt stocks (and realizing that margin could have wiped out everything I had) convinced me to avoid any form of borrowing for investment. Now, I would even consider having a mortgage while investing in equities a form of leverage (I realize this position is extreme) and insist on being debt free. .
All flyers we get in the mail automatically go in the bin. We don’t need anyone telling us what we want, before we want it. If we want something, then I search for the best option.
That is a good policy. It is how I treat cold sales calls, but it might be worth expanding that to flyers too 🙂
If you and your wife have been saving about 5 million yen per year and are confident that this level will continue, then the “900,000 yen of principal repayments to be made” could be met from the income you would save. In that sense, selling stocks to pay back the principal would be unnecessary.
True, but then we would lose out on dollar cost averaging into the next crash… which I suspect will arrive sooner rather than later. But that could go either way.
What about borrowing money to invest in real estate for example. Would your rule still stand?
Ha, ha, not a rule. Very much context specific. For me, at the moment, this did not make sense. A different deal in a different situation might 🙂