I’ve never borrowed money explicitly to invest, and I’ve never recommended that anybody else does it either.
But with mortgage rates plunging to all-time lows in recent months, it is incredibly tempting to do so.
Because if you’re a homeowner, there has never been a cheaper time to borrow money than today.
Cheap As Chips
Right now, homeowners with a bit of spare equity in their property can get a 10-year fixed-rate mortgage at an all-time low rate of less than 3%.
First Direct and Nationwide are both offering 10-year fixed rates charging 2.89%, up to 60% and 65% loan-to-value (LTV) respectively.
Most investors will surely fancy their chances of generating a total return of more than 3% a year from the stock market over the next decade.
I know I do. So why not take the plunge?
Power of Ten
You can take out even cheaper finance if you want. Yorkshire Building Society has a variable rate mortgage at just 1.18%, or a five-year fix at 2.24%, but I think the timescale is too short.
The longer you give stock markets to work their magic, the less risky they ultimately are.
Over 10 years, the odds are in your favour. But it’s still a gamble.
Earn 3.5% A Year
If you take out a 10-year fixed-rate mortgage, you know exactly what you will be paying for the next decade.
You have absolutely no idea what you will get on the stock market.
That said, the FTSE 100 yields 3.5% right now (and rising). Take that tax-free inside your Isa allowance, and the dividend yield alone will cover your mortgage interest, with room to spare.
If you invest in top FTSE 100 dividend payers such as BHP Billiton, BP, HSBC Holdings, GlaxoSmithKline, Royal Dutch Shell and Vodafone, all of which yield more than 5%, you will have an even wider margin.
Now Or Never
Even if you allow for the mortgage arrangement fee, which is £999 at Nationwide and £950 at First Direct, you should end up well on top.
Any capital growth will see you motor ahead. Given that the long-term average annual return on the FTSE All-Share is 10%, you could end up out of sight.
Leveraging up in this way is of course a risky thing to do. I wouldn’t recommend it to the vast majority of investors.
But if you are tempted, there’s never been a better time to borrow money to invest. And I can’t see there ever will be again.
