I will be forever grateful to you, you changed my whole life and I will continue to preach on your behalf for the whole world to hear you saved me from huge financial debt with just a small investment, thank you Catherine Gauthier.
Wow. I'm a bit perplexed seeing her been mentioned here also Didn't know she has been good to so many people too this is wonderful, I'm in my fifth trade with her and it has been super.
She is my family's personal Broker and also a personal Broker to many families in the United states, she is a licensed broker and a FINRA AGENT in the United States.
I always wondered how many people were doing this with 2% mortgages in the mid 2010s. An interesting concept to ponder. It does of course ignore job security, income taxes, life events, and other important factors. For most people, you cannot put a price on peace of mind. The peace of mind of having zero debt is a great feeling. You own what is yours.
Sure - But you would have piece of mind with a growing 100K too right? If you use all your money to pay down your mortgage and half way through you lose your job you might be forced to sell. Whereas if you lost your job but had remortaged to take cash out prior, you would have plenty of liquid funds to survive. I see that as piece of mind....
There's mistake in the calculations of the real profit from investing using borrowed money: you have also to consider that you have to give back the installments to the loaner (part of capital + interests), so the capital on which the compound interest operates, is reduced each time you pay an installment. A good example of the force of compound interest though.
The problem I see that you did not account for was the cash used to make the loans monthly payments. Where does that come from? It can’t come from your investments because then you would be lowering the amount of your investment, decreasing your investment returns. At that point it might be better to dollar cost average into the S&P with the cash you would use to make the loan payments.
@@FinancialWisdom At least someone has seen the light. No offence to Gareth. I see the bigger picture. I have done exactly the same with a second mortgage at a 1% 5-year fix. But your calculations aren't like for like. If you take the cost of servicing extra debt, you reduce the potential gains!! You can't just say it is coming from regular income. If that's the case, you need to add the same amount to the other side for a fair comparison.
@@kariyapperuma no. If you have interest only you can release capital and keep the overall payment the same as a repayment mortgage, therefore the difference is neutral
Appreciate the challenge to think outside conventional wisdom. However, I think there's a big assumption being made in these examples. Which is the investment is allowed to compound without interruption till end of study without regard for the loan repayments. Unless there's an alternative source of income to pay back the debt, one would need to make regular withdrawals against the investment; negating the compounding effect you described.
Agreed. The comparison is leaving out the factor of the extra income that had to come in in order to service the loan. A penny in column A is the same as a penny in column B. The difference is what that penny is doing. Borrowing at 5% and investing at 3%, that penny is net debt 2%. The difference in the comparison's outcome is being paid for in the lifestyle difference in order to sustain the increased loan payments. Comparison should be made in a closed system which accounts for all movements of funds. The housing equity is a great point however. It's a gamble, but if you can reliably cover the costs anyway, and know the housing market's long-term trend outpaces the mortgage costs, you're basically keeping the investment of someone else's money for sitting on the risk of the market changing. In the current interest climate, I feel sorry for someone who's overleveraged, but if you got into a $1M mansion at 1% interest after the '08 crash and paid only interest of $10k/y, that's about $150k spent until 2023. Meanwhile inflation in housing prices from 2008 to 2023 totals about 45%, meaning that McMansion is now worth about $1.45M. $450k - $150k = $300k essentially free money (bought at the cost of holding the risk). If you had continually borrowed against the increased equity down to the original mortgage and invested that, you'd be even further ahead. If you did it in such a way as to deduct the interest as a tax expense, then you'd be even further ahead still. IIRC this is known as the Smith Move.
Thanks Gareth. Thought provoking as always. There a couple of variables that need to be considered with this including age of the investor, Capital Gains Tax and Dividend Tax. Plus the possibility of a 'lost decade' for the SPX such as 2000-2009. I think it could work quite well for a young investor with the money in an ISA. But someone starting this investment in January 2022 would have seen a fast drawdown of 20% which would be unnerving. There are also currency risks for the UK investor - who does well when the USD strengthens, but not so well when the GBP strengthens. If the GBP strengthens 10% against the USD, theUS tracker fund (eg VUSA) will devalue by 10%.
This is a really interesting topic and one I've been researching. One method was moving to an interest only mortgage and using the difference in the amount of repayment vs interest only to pay into my pension which should yield a better % return and then using the increase pension pot to pay off the remaining capital on the mortgage. I think borrowing such a sum against the mortgage to make this work is difficult for most as the increase in monthly payment even on an interest only mortgage could be prohibitive, but it's certainly food for thought
There is one HUGE factor that is being overlooked in this scenario... you have to be able to make the payments of the loan! I would doubt many people could afford more debt obligation to their current situation???
Of course but I'm sure most would understand this. Also consider though, any short term payment concerns could be covered by the growing investment to meet short term demands.
In these days of high interest rates it doesnt make a ton of sense but in the good old days of 2% mortgage rates it made a ton of sense! At sub-5% rates, depending on term of loan and such, the payments were about $500/month. You would def have to do the maths on whether or not you could reasonably afford to make the new payment. But if you could get an interest only loan or do a reasonably rated cash-out refi then it def is worth considering. Everyones situation is different and there are many ways of borrowing money.
You need to substract the money needed to pay the installment each year from the investment account. Reduce the ending balance of each year by 701.52 then youll get the real number.
I did it with a 0% APR for a year!!!! Now mind you I did this no kids and in my moms basement!!! Back then a CC of 8000 was better than most adults. I took the 8 and invested half traded the other half 😂😂😂😂 should have invested it all the trading half just helped me learn how to trade which means it went in the trash but great learning experience. It helped me learn how to trade and the other half actually turned into 20k lucky me 🤷🏿🤷🏿 also I dont advise actual people with families to try that unless you know you can atleast pay back the funds in that year or 2 years time
hi. am I missing a critical point? I assume the amortisation (reducing interest rate over time) occurs bc of the principle paid each year. Where does the money come from to pay the principle? ( Is it from new money, earnings from your trading or capital from the original loan) In either case it changes your figures....? Also how do you hedge against rising interest rates and falling equities in this example? Sounds like risky advice for beginners. Thank you
I thought the same! shouldn´t that principal be substracted from monthly interest of the investment, to pay it off? then 2nd year you should have $10.093,81 on your start balance..and so on. Right?
Absolutley brilliant, helping people with these videos is true giving back! I can't thank you enough for bringing this to light, keep up the great work and I have now subscribed
What do you mean "perhaps a fundamental analysis"? Trading just or mainly fundamentals might not be the most common approach, but it's not exactly unheard of.
You aren't including the loan payments in the same account as the compounding payments. But it is the same money. You calculate compounding returns without factoring in the reduced capital due to servicing the loan. It doesn't make any sense.
I have a HELCO right now. Haven't done anything with it. I have thought about something similar. I have no kids or relatives that could inherit my house when i kick the bucket. Really would like to make use of it before i move on. I rather spend it on traveling in my retirement, then letting it go to the state or whomever. I guess a reverse mortgage is always an option.
Your content has been a huge help in my progress. Thank you!! I was wondering, since you do your consolidation. charting on the weekly time frame, on what time frame do you make your entries and exits? Thanks!
How are these people making the extra interest and principal payments on their home equity line of credit? You should probably subtract these payments from the returns on the S&P 500. I also don’t think 5% is very probable. Especially for a fixed rate loan today.
Hmmmm.. The calculation will not be completed without showing returns from second option ie that is Monthly payments you are making into loan can be used to make SIP investment if you do not have the loan...... Since you are claiming to be confident of 7% return same must be applied to SIP also...It will make only sense if first option generates more profit than second.....
Agree Kiran, but if you align the interest only payment to the total monthly payment of the loan I.e parity each month, you release funds to compound from day one
.... 1st option is a bullshit, it makes the assumption that investment's interest is reinvested and not used during the investment period, but it doesn't take into consideration that at the same time you need to somehow get the money to pay the loan installments.... and over the 25 periods (no matter what they are) the difference is not significant enough to jeopardize one person's liquidity
Hi. While it's true that if you take a 10K$ loan for 25 years (paying 701.52$ back each year as amortization) and invest that sum in something that gives you a 3% annual return you end up with a larger total than just piling up what you would have paid to estinguish the loan, it's also true that if you would invest each year those 701.52$ in the same 3% annual return investment you would end up with even a larger sum (more than 25K$ against the 20K$ investing the borrowed money, at the end of the 25th year), and that's true until the return of the investment is lower than the interest applied to the loan.
Hello. I don't think the video showed the real story frankly. You didn't explain how the person is servicing the loan. Their income and expenses are the same so therefore the loan would need to be serviced using the interest / principal of the loan. In the amortized ex. they would be screwed, in the simple interest ex of the HELOC the end number would be lower..
the maths here is incorrect. in the first example your not borrowing $10k for 10 years. every year that passes your borrowing less because your repaying the loan. your $10k investment would not cover the loan repayment amounts ($700 a year).
the secret sauce is that you can invest in things that yield alot mroe than sp500 7% and this is how u compound into infiinite money :DD dont tell the tax man shhhh
Never usually like videos but this is great content and I couldn't avoid doing it! Fanstatic video! Debt is risky and exploring the theory behind debt is always interesting.
The SPX has in a number of cases, in real terms given ABSOLUTELY horrendous returns, like 85% loss in the late 60s to 70s. We may be facing something like that soon. Do not put all your eggs in one basket, look at how expensive assets are now relative to one another over and how they cycle over years and decades.
Your case of borrowing at 5% to invest at 3% is a bad example because the loan is being repaid over time, which means your leverage is decreasing over time. Of course the interest incurred would be lower if the principal decreases over time.
Interest rates always rise. The high 10-11% or even more in the past are short lived (approx 1-3 years). The 2-3% rate is an ideal some countries are after but this figure can be had if you average it out over the years as well. Not only that, but, not every business in the S&P500, is negatively affected by inflation. What this guy said does make a lot of sense given the appropriate time horizon.
my own experience i took loan at 7.5% to buy a car even though i had cash invested in stock market thinking i will make minimum 12%, past 1 year bear market is going on i am losing money in the stock market investments & i am paying interest to the loan,😅
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I will be forever grateful to you, you changed my whole life and I will continue to preach on your behalf for the whole world to hear you saved me from huge financial debt with just a small investment, thank you Catherine Gauthier.
Wow. I'm a bit perplexed seeing her been mentioned here also Didn't know she has been good to so many people too this is wonderful, I'm in my fifth trade with her and it has been super.
She is my family's personal Broker and also a personal Broker to many families in the United states, she is a licensed broker and a FINRA AGENT in the United States.
You trade with Catherine Gauthier too? Wow that woman has been a blessing to me and my family.
I'm new at this, please how can I reach her?
I was skeptical at first till I decided to try. Its huge returns is awesome. I can't say much
I always wondered how many people were doing this with 2% mortgages in the mid 2010s. An interesting concept to ponder. It does of course ignore job security, income taxes, life events, and other important factors. For most people, you cannot put a price on peace of mind. The peace of mind of having zero debt is a great feeling. You own what is yours.
Sure - But you would have piece of mind with a growing 100K too right? If you use all your money to pay down your mortgage and half way through you lose your job you might be forced to sell. Whereas if you lost your job but had remortaged to take cash out prior, you would have plenty of liquid funds to survive. I see that as piece of mind....
There's mistake in the calculations of the real profit from investing using borrowed money: you have also to consider that you have to give back the installments to the loaner (part of capital + interests), so the capital on which the compound interest operates, is reduced each time you pay an installment. A good example of the force of compound interest though.
The problem I see that you did not account for was the cash used to make the loans monthly payments. Where does that come from? It can’t come from your investments because then you would be lowering the amount of your investment, decreasing your investment returns. At that point it might be better to dollar cost average into the S&P with the cash you would use to make the loan payments.
With the money already in the S&P, wouldnt you be paying off the loan with your salary?
Which part of the video cory? The monthly payment whether it be capital or the interest only would come from you regular income
@@FinancialWisdom At least someone has seen the light. No offence to Gareth. I see the bigger picture. I have done exactly the same with a second mortgage at a 1% 5-year fix. But your calculations aren't like for like. If you take the cost of servicing extra debt, you reduce the potential gains!! You can't just say it is coming from regular income. If that's the case, you need to add the same amount to the other side for a fair comparison.
@@kariyapperuma no. If you have interest only you can release capital and keep the overall payment the same as a repayment mortgage, therefore the difference is neutral
I was unaware that you could pay the interest only on a home loan. I had to watch it again to catch it.
Appreciate the challenge to think outside conventional wisdom. However, I think there's a big assumption being made in these examples. Which is the investment is allowed to compound without interruption till end of study without regard for the loan repayments. Unless there's an alternative source of income to pay back the debt, one would need to make regular withdrawals against the investment; negating the compounding effect you described.
Agreed. The comparison is leaving out the factor of the extra income that had to come in in order to service the loan. A penny in column A is the same as a penny in column B. The difference is what that penny is doing. Borrowing at 5% and investing at 3%, that penny is net debt 2%. The difference in the comparison's outcome is being paid for in the lifestyle difference in order to sustain the increased loan payments. Comparison should be made in a closed system which accounts for all movements of funds. The housing equity is a great point however. It's a gamble, but if you can reliably cover the costs anyway, and know the housing market's long-term trend outpaces the mortgage costs, you're basically keeping the investment of someone else's money for sitting on the risk of the market changing. In the current interest climate, I feel sorry for someone who's overleveraged, but if you got into a $1M mansion at 1% interest after the '08 crash and paid only interest of $10k/y, that's about $150k spent until 2023. Meanwhile inflation in housing prices from 2008 to 2023 totals about 45%, meaning that McMansion is now worth about $1.45M. $450k - $150k = $300k essentially free money (bought at the cost of holding the risk). If you had continually borrowed against the increased equity down to the original mortgage and invested that, you'd be even further ahead. If you did it in such a way as to deduct the interest as a tax expense, then you'd be even further ahead still. IIRC this is known as the Smith Move.
The stock market is one of the toughest mental games in the world, What’s is the earliest way to make money from the stock market?
@Giovanni Nolan Please, How can i get in touch with a financial coach for guidance?
@Giovanni Nolan Thanks for sharing, I found his details on his web page online
Thanks Gareth. Thought provoking as always. There a couple of variables that need to be considered with this including age of the investor, Capital Gains Tax and Dividend Tax. Plus the possibility of a 'lost decade' for the SPX such as 2000-2009. I think it could work quite well for a young investor with the money in an ISA. But someone starting this investment in January 2022 would have seen a fast drawdown of 20% which would be unnerving. There are also currency risks for the UK investor - who does well when the USD strengthens, but not so well when the GBP strengthens. If the GBP strengthens 10% against the USD, theUS tracker fund (eg VUSA) will devalue by 10%.
Very true william - Thought provoking was the goal 👍
This is a really interesting topic and one I've been researching. One method was moving to an interest only mortgage and using the difference in the amount of repayment vs interest only to pay into my pension which should yield a better % return and then using the increase pension pot to pay off the remaining capital on the mortgage.
I think borrowing such a sum against the mortgage to make this work is difficult for most as the increase in monthly payment even on an interest only mortgage could be prohibitive, but it's certainly food for thought
Nice " thinking out of the box" video- well done!
Thanks!
There is one HUGE factor that is being overlooked in this scenario... you have to be able to make the payments of the loan!
I would doubt many people could afford more debt obligation to their current situation???
Of course but I'm sure most would understand this. Also consider though, any short term payment concerns could be covered by the growing investment to meet short term demands.
Wow, I have been wondering this exact thing, great minds think alike.
The King Speaks!
Can you make a video on all the various risks and consequences? For when things don't go as planned, and maybe also how to recover.
In these days of high interest rates it doesnt make a ton of sense but in the good old days of 2% mortgage rates it made a ton of sense! At sub-5% rates, depending on term of loan and such, the payments were about $500/month. You would def have to do the maths on whether or not you could reasonably afford to make the new payment. But if you could get an interest only loan or do a reasonably rated cash-out refi then it def is worth considering. Everyones situation is different and there are many ways of borrowing money.
You need to substract the money needed to pay the installment each year from the investment account. Reduce the ending balance of each year by 701.52 then youll get the real number.
Great video! I'm always looking for unconventional ways to improve my family's financial situation
👍
Great content as ever Gareth, thank you!
Glad you enjoyed it
I was waiting for this video for a while now
I did it with a 0% APR for a year!!!! Now mind you I did this no kids and in my moms basement!!! Back then a CC of 8000 was better than most adults. I took the 8 and invested half traded the other half 😂😂😂😂 should have invested it all the trading half just helped me learn how to trade which means it went in the trash but great learning experience. It helped me learn how to trade and the other half actually turned into 20k lucky me 🤷🏿🤷🏿 also I dont advise actual people with families to try that unless you know you can atleast pay back the funds in that year or 2 years time
Well done
hi. am I missing a critical point?
I assume the amortisation (reducing interest rate over time) occurs bc of the principle paid each year.
Where does the money come from to pay the principle? ( Is it from new money, earnings from your trading or capital from the original loan) In either case it changes your figures....?
Also how do you hedge against rising interest rates and falling equities in this example?
Sounds like risky advice for beginners.
Thank you
I thought the same! shouldn´t that principal be substracted from monthly interest of the investment, to pay it off?
then 2nd year you should have $10.093,81 on your start balance..and so on. Right?
*Be a contrarian!*
No Pain, No Gain.
Absolutely
Can you recommend a book / paper for an indepth analysis on this topic?
Excellent Info man, keep up the good work. Thanks, a lot!
Thanks, will do!
Absolutley brilliant, helping people with these videos is true giving back! I can't thank you enough for bringing this to light, keep up the great work and I have now subscribed
You're very welcome!
What do you mean "perhaps a fundamental analysis"?
Trading just or mainly fundamentals might not be the most common approach, but it's not exactly unheard of.
I personally use both. I look for good quality companies and buy them at a solid technical setup offering controlled risk.
“Technical and, perhaps, fundamental analysis”
Hmm i think there is an important hidden message here…
You aren't including the loan payments in the same account as the compounding payments. But it is the same money. You calculate compounding returns without factoring in the reduced capital due to servicing the loan. It doesn't make any sense.
Not sure what you mean...
I have a HELCO right now. Haven't done anything with it. I have thought about something similar. I have no kids or relatives that could inherit my house when i kick the bucket. Really would like to make use of it before i move on. I rather spend it on traveling in my retirement, then letting it go to the state or whomever. I guess a reverse mortgage is always an option.
Yes. A lifetime mortgage would be a great option in your case.
This is assuming that you have a seperate pool of money to make the loan repayments
A wage, although if you switched to interest only you can borrow more with the same outgoing
Fantastic video! I immediately sent to several people that I thought would benefit. You’re careful analysis in comparison really big. Bravo.
Awesome, thank you!
Well done mate!
Thanks 👍
But where I live properties gain value at a crazy rate and capital gains are taxed at all 1/3rd soo
have you consider taxation in your calculations?
No tax, but that is why I kept it Conservative
Max out my credit, take out a 2nd mortgage on my house, and put it all into the stock market. Got it.
No don't max out your credit. But if you can leverage lower cost debt with higher rate of return then absolutely
Alas, the era of cheap debt is over.
Don't forget about Uncle Sam, He needs a cut of that gain.
Your content has been a huge help in my progress. Thank you!!
I was wondering, since you do your consolidation. charting on the weekly time frame, on what time frame do you make your entries and exits? Thanks!
waav great advice and learning. no words to say "Thankyou" ...
So nice of you
Question can you really get a 25 years interest only loan at 5% for your residential property?
US can get 30
@@FinancialWisdom I can get max 5 on buy to let only (uk)
How are these people making the extra interest and principal payments on their home equity line of credit? You should probably subtract these payments from the returns on the S&P 500.
I also don’t think 5% is very probable. Especially for a fixed rate loan today.
Dave Ramsey needs to watch this 😆
LOL - He has some good foundation but is far too conventional
Hmmmm.. The calculation will not be completed without showing returns from second option ie that is Monthly payments you are making into loan can be used to make SIP investment if you do not have the loan...... Since you are claiming to be confident of 7% return same must be applied to SIP also...It will make only sense if first option generates more profit than second.....
Agree Kiran, but if you align the interest only payment to the total monthly payment of the loan I.e parity each month, you release funds to compound from day one
Awesome video
Glad you enjoyed it
.... 1st option is a bullshit, it makes the assumption that investment's interest is reinvested and not used during the investment period, but it doesn't take into consideration that at the same time you need to somehow get the money to pay the loan installments.... and over the 25 periods (no matter what they are) the difference is not significant enough to jeopardize one person's liquidity
Hi. While it's true that if you take a 10K$ loan for 25 years (paying 701.52$ back each year as amortization) and invest that sum in something that gives you a 3% annual return you end up with a larger total than just piling up what you would have paid to estinguish the loan, it's also true that if you would invest each year those 701.52$ in the same 3% annual return investment you would end up with even a larger sum (more than 25K$ against the 20K$ investing the borrowed money, at the end of the 25th year), and that's true until the return of the investment is lower than the interest applied to the loan.
Nice comparisons there 👍
Thanks! 👍
Hello. I don't think the video showed the real story frankly. You didn't explain how the person is servicing the loan. Their income and expenses are the same so therefore the loan would need to be serviced using the interest / principal of the loan. In the amortized ex. they would be screwed, in the simple interest ex of the HELOC the end number would be lower..
the maths here is incorrect. in the first example your not borrowing $10k for 10 years. every year that passes your borrowing less because your repaying the loan. your $10k investment would not cover the loan repayment amounts ($700 a year).
Very interesting
Thanks Greg
i struggle to explain this to my friends too lmao also topics like renting is cheaper than home ownership, so many arguemetns hahahaha
the secret sauce is that you can invest in things that yield alot mroe than sp500 7% and this is how u compound into infiinite money :DD dont tell the tax man shhhh
Seems your calculation is based an assumption that you don't need to pay your debt monthly, instead paying it back at the end of the loan period?
Just divide it by 12, same as the investment compounding annually not monthly
Never usually like videos but this is great content and I couldn't avoid doing it! Fanstatic video!
Debt is risky and exploring the theory behind debt is always interesting.
Thanks!
wow definitely thinking outside the box :)
Yep, contentious issue for most
Good luck if those 15 years are like 1999-2014 🤦🤦🤦
Get a prop trading account
The SPX has in a number of cases, in real terms given ABSOLUTELY horrendous returns, like 85% loss in the late 60s to 70s. We may be facing something like that soon.
Do not put all your eggs in one basket, look at how expensive assets are now relative to one another over and how they cycle over years and decades.
Just use a 10 ema 20 ema crossover on a weekly chart, no significant spx drawdown. Simple risk control
in theory it is good but not practical
Your case of borrowing at 5% to invest at 3% is a bad example because the loan is being repaid over time, which means your leverage is decreasing over time. Of course the interest incurred would be lower if the principal decreases over time.
I miss your point - what you refer to is amortization as pointed out.
Rising interest rates destroys your SP500 and property projections.
Technically yes. If you get a long date mortgaged sure you are payin more in interest rates but you know the costs.
Interest rates always rise. The high 10-11% or even more in the past are short lived (approx 1-3 years).
The 2-3% rate is an ideal some countries are after but this figure can be had if you average it out over the years as well.
Not only that, but, not every business in the S&P500, is negatively affected by inflation.
What this guy said does make a lot of sense given the appropriate time horizon.
The key is fixing the interest rate i.e 15 to 30 years. The S&P has always delivered long term
Thanks Mr M
my own experience i took loan at 7.5% to buy a car even though i had cash invested in stock market thinking i will make minimum 12%, past 1 year bear market is going on i am losing money in the stock market investments & i am paying interest to the loan,😅