With low interest rates and a home mortgage with, say 50% LVR, does it make sense to use equity to buy dividend stocks (or dividend-paying funds), and use the profit off that to pay the interest of the actual remaining amount? Currently at 2+%, and not bound to go up at any time in the near future, the chances of profit can be good.
Using Home Equity to Buy Dividend Stocks to Offset Interest
jabanco on 20/11/2020 - 09:20
Last edited 20/11/2020 - 09:21
Last edited 20/11/2020 - 09:21
Comments
You meant debt recycling?
What happens if the stocks don't pay a dividend and/or go down in value? You need to weigh up the risk/reward.
The cash flow problem. Mortgages you have to pay monthly. Dividends go up / down or stop. OP needs to check his employment / regular income can fill the hole.
Speak to a financial advisor and/or accountant.
Yes it makes sense, it's called leverage.
No one here bats an eyelid when someone uses equity to purchase an investment property, but doing the same with shares is just as risky, and could be considered safer because of diversification.
However it is increased risk, essentially you are investing with money that you don't actually own, and you must eventually pay back. But the risk isn't too high, because you should be able to pay off the loan even if you lose everything (otherwise the bank wouldn't lend you the money).
Get professional tax advice though, redrawing from a PPOR loan in order to purchase an income generating investment can quickly become a tax nightmare if you do it wrong.
No one here bats an eyelid when someone uses equity to purchase an investment property, but doing the same with shares is just as risky, and could be considered safer because of diversification.
Because if the market goes down 10% tomorrow it is in red. Where as you drive around to your investment property it is looks like everything is okay.
I would, put in an etf and take the risk.
If you want to claim the 2% a a tax deduction, borrow off the loan for the purpose if investing. see a finc advisor though.If the stocks go up then this is not a problem.
Plan for the scenario when stocks go south and you have to make the repayments.
you have to make the repayments either way, and given that OP already has the loan, they should be able to afford them.
Yes, if coupled with good planning then its not an issue.
If the OP is banking on capital growth and or passive income to make payments, it gets shaky.
Did this when Covid hit in March and stocks tanked.
Only regret was that I didn't do it more.
70% to 90% of people lose money in the stock market. People FOMO in a bull market and sell when they see a dip.
People should be prepared to hold the assets for a few years or sell sooner as a risk management plan.
Source?
I assume you are talking about day trading / penny stocks
DYOR.
https://duckduckgo.com/?q=people+lose+money+on+the+stock+mar…I'll post a chart when I'm in front of a computer.
Agree with holding on for a while.
I bought Cochlear at $70 about 10-15 years back (CBF looking it up). For years I thought about selling as capital growth was minimal and dividends were no better than bank interest. It's only in the past few years it has kicked off. It's my best performer in the portfolio now.
THere were a few others that I did sell and regret the decision now.
check with ato regarding tax implications.
I did this a number of years ago and it's working well. I split off some of my line of credit limit into a separate account and used that to buy shares that paid a reasonable dividend. I needed to make the repayments myself for the first six months but since then it's been self-supporting; I have the dividends paid into a separate account and the repayments are debited from there. Twice a year (early May / November) after dividend payment season I make sure there's enough in the account to cover the next six months, then transfer the remaining funds across as a principal reduction.
No.