Investor
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Post by Investor on Jan 19, 2015 23:37:30 GMT
Or until Zopa borrower rates drop below RS lender rates.
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mikes1531
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Post by mikes1531 on Jan 20, 2015 3:07:48 GMT
Or until Zopa borrower rates drop below RS lender rates. Nope. Sorry. The tax situation would kill that plan. Of course, if you're not a taxpayer it would work. But then, if you're not a taxpayer you probably couldn't borrow from Zopa.
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bigfoot12
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Post by bigfoot12 on Jan 20, 2015 14:40:26 GMT
I have mixed feelings about borrowing to lend. People in this country have a phenomenal tolerance for leverage - as long as the asset happens to be property. Nothing wrong with a bit of 20:1 leverage via a 95% LTV mortgage! Of course if you talk about borrowing to buy any other asset - shares, bonds or loans, then many people cry out that such speculation is absolutely irresponsible. This is of course nonsense. However, it is true that the playing field for leveraged investment has been tilted (mainly through taxation) in favour of borrowing to buy property rather than other types of asset. However, I must admit to considering levering up modestly on my investment portfolio. My personal approach would be to use a credit line from a PB, securitized against the asset portfolio. A similar approach would use an offset mortgages since if you cannot deploy the capital, you can offset the liability. These mortgages are now available at around 1.5% for a two-year fix. Using 2:1 leverage, the return on capital of a securitized P2B portfolio of loans (say 10% nominal yield, and assuming reasonable default and recovery outcomes) would be in the same ballpark to an equivalent 50% LTV BTL investment. For zero or 20% taxpayers, it might be actually somewhat better but inferior for 40% or 45% taxpayers. The key would be to feel confident that you have the liquidity to unwind the book quickly if the need arose. I have very similar feelings. One of the few good things about BTL is the ease that leverage can be obtained and offset against tax. I too am considering adding a little leverage. I am considering selling some equities and replacing them with Futures, CFDs or spread bets. Then I use some of the proceeds in P2P. I think that this solves much of the tax problem as the borrowing costs are built into these products and might even save me some tax. I haven't worked how much cash I will need to keep back to meet margin payments (earning very little) and maybe this will have too big an impact. The implicit interest rate in these products varies and also these products need to be rolled every few months (or more often) and that will have costs (and effort) which I need to work out if it is worth it.
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bigfoot12
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Post by bigfoot12 on Jan 20, 2015 14:58:37 GMT
Anybody got any idea what happens to P2P interest rates when the BoE starts hiking? It matters if you borrow to invest!
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Post by tybalt on Jan 20, 2015 16:41:05 GMT
Logically they go up by similar amounts but there is no history so a pure gamble.
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pikestaff
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Post by pikestaff on Jan 20, 2015 19:57:14 GMT
My view is there will very little movement until the base rate rises to 3%. I think the base rate is so low at present that most rates are somewhat decoupled from it.
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Post by longjohn on Jan 22, 2015 1:44:45 GMT
Back in the mid 80s when the base rate was over 11% I switched to a 'base rate for life' credit card. It came with a fee of £10 a month and the interest rate matched the base rate. There was very little difference in cost between this and standard cards costing 2.2% interest per month at the time.
As the years passed I was given increases in my credit limit. It reached £20,000 in 1995 and has remained so ever since. At the time my balance was around £4000 which was quite high enough. Around 1999 base rate had dropped to 5% and I realised I could earn more from the stock market than I was paying in interest. I started using the card to pay for all my bills and shopping. I soon approached the card limit and I keep the balance around £19,500. The money I saved I put into a couple of investment trusts.
In 2002 I broke even with dividend income matching interest and fees. Since then the income has steadily increased and base rate has equally dropped. From 2009 I've been in the fortunate position of having borrowed £19,500 at 0.5% interest plus £120 giving me a cost of £220 a year. The trusts have more than trebled in value (despite lots of ups and downs) and I currently get £2,800 annual income from them.
Borrowing to invest works well if you have two things. 1, a permanent very low interest rate on your borrowings. 2, lots of time.
Actually three things. 3, luck. I hadn't planned this, it just happened that interest rates came down whilst I had the best credit card for that situation.
And no they will not increase my credit limit any more.
John
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mikes1531
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Post by mikes1531 on Jan 22, 2015 2:20:55 GMT
Actually three things. 3, luck. I hadn't planned this, it just happened that interest rates came down whilst I had the best credit card for that situation. And no they will not increase my credit limit any more. And your luck still is holding -- since if you read the fine print of the credit agreement I expect you'll find that they have the right to change your credit limit whenever they like to whatever they like. And I'm really surprised that they haven't reduced it considerably over the past few years. Keep your fingers crossed. And enjoy it while you can.
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adrianc
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Post by adrianc on Jan 22, 2015 10:13:19 GMT
Nice work on the credit card, LongJohn... It brings to mind the fad for borrowing on the many and generously-limited zero% cards in the mid '00s, then investing the money - "Stoozing", IIRC?
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Investor
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Post by Investor on Jan 22, 2015 12:01:22 GMT
Nice work on the credit card, LongJohn... It brings to mind the fad for borrowing on the many and generously-limited zero% cards in the mid '00s, then investing the money - "Stoozing", IIRC? It is indeed 'stoozing' and has continued well past the mid '00s. At least 25k of my P2P investments are currently financed by two incredibly generous High street bank credit cards who are happy for me to borrow money for two years for free.
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j
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Post by j on Jan 22, 2015 22:08:14 GMT
Nice work on the credit card, LongJohn... It brings to mind the fad for borrowing on the many and generously-limited zero% cards in the mid '00s, then investing the money - "Stoozing", IIRC? It is indeed 'stoozing' and has continued well past the mid '00s. At least 25k of my P2P investments are currently financed by two incredibly generous High street bank credit cards who are happy for me to borrow money for two years for free. Provided you don't lose money & know when to get out then Yes well done & very god luck with it
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Post by longjohn on Jan 23, 2015 13:08:15 GMT
Actually three things. 3, luck. I hadn't planned this, it just happened that interest rates came down whilst I had the best credit card for that situation. And no they will not increase my credit limit any more. And your luck still is holding -- since if you read the fine print of the credit agreement I expect you'll find that they have the right to change your credit limit whenever they like to whatever they like. And I'm really surprised that they haven't reduced it considerably over the past few years. Keep your fingers crossed. And enjoy it while you can. The wording of the T&Cs is such that they cannot do anything unless I miss a payment or exceed the limit. The Co-op. It's a bank but not as we normally know it. John
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mikes1531
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Post by mikes1531 on Jan 23, 2015 19:36:52 GMT
And your luck still is holding -- since if you read the fine print of the credit agreement I expect you'll find that they have the right to change your credit limit whenever they like to whatever they like. And I'm really surprised that they haven't reduced it considerably over the past few years. Keep your fingers crossed. And enjoy it while you can. The wording of the T&Cs is such that they cannot do anything unless I miss a payment or exceed the limit. The Co-op. It's a bank but not as we normally know it. : Interesting. I haven't read the Ts&Cs on my Co-op credit card recently but a couple of years ago, after a period when I hadn't been using it much, they reduced my credit limit by a factor of ten! (They claimed it was the result of general review of their credit card accounts.) And it wasn't a low interest one, either. You have done very well.
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jonno
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nil satis nisi optimum
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Post by jonno on Jan 23, 2015 20:02:21 GMT
The wording of the T&Cs is such that they cannot do anything unless I miss a payment or exceed the limit. The Co-op. It's a bank but not as we normally know it. : Interesting. I haven't read the Ts&Cs on my Co-op credit card recently but a couple of years ago, after a period when I hadn't been using it much, they reduced my credit limit by a factor of ten! (They claimed it was the result of general review of their credit card accounts.) And it wasn't a low interest one, either. You have done very well. Wow! Two ethical P2P investors in one fell swoop 
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Post by valueinvestor123 on Jan 23, 2015 20:58:56 GMT
I too am considering adding a little leverage. I am considering selling some equities and replacing them with Futures, CFDs or spread bets. Then I use some of the proceeds in P2P. I think that this solves much of the tax problem as the borrowing costs are built into these products and might even save me some tax. I haven't worked how much cash I will need to keep back to meet margin payments (earning very little) and maybe this will have too big an impact. The implicit interest rate in these products varies and also these products need to be rolled every few months (or more often) and that will have costs (and effort) which I need to work out if it is worth it. This interests me because I am actually doing it. Mainly to make it more tax and capital efficient and increase income for reinvestment/growing portfolio. My liquid assets are currently organized like this: About 50% of physical liquid assets is in equities, from that, half is in ISAs. I have further exposure through IG index (spreadbetting) to a synthetic stock portfolio equivalent to about 30% of liquid assets. The collateral/margin for that is more than provided for by the stock portfolio outside the ISA (IG lets you link your stockbroking account with your spreadbetting account which frees up quite a lot of cash. Obviously I try to hold stocks and trusts which are as little correlated as possible with the spreadbetting account (I wish they'd allow that with ISA account at some point because eventually I want to have as much as possible inside the ISA.) The borrowing costs with IG should be around 2.5-3% (much less on indeces, gold, oil and other instruments which are actually not very straightforward to buy physically. The funding cost is more than offset by interest from p2p investments in my wife's name who doesn't pay much taxes (15% of assets, I might increase this to 20%). I also keep between 5%-10% in cash earning next to nothing just in case and have some corporate bonds (15% of assets). The main risks (apart from wife running away with all the p2p) is that I am not sure what risk category p2p investments should be classified as since there isn't much of a precedent for them and obviously, this set up is suitable under such favourable interest rate environment, I am not sure what will happen once interest rates go to 6-12% which is possible. I can also see p2p rates converging more with BOE rates once they become more mainstream. Also a major risk is the domino effect, should all assets move in the same downward direction. I have to probably make a more 'sophisticated' model to account for various unlikely assumptions. I haven't bothered because, frankly, most unlikely scenarios are supposed to stay beyond ones imagination otherwise they wouldn't be unlikely...But in the event of cascade of margin calls (and if physical stock account is not enough to offset them), first port of call is the cash in bank, 2nd are the various p2p platforms, 3rd the fixed income investments, 4th the physical shares in ISA which is the last resort. It should never come to the 4th port of call (or even 3rd), since p2p and cash is equivalent to roughly 90% spreadbetting holding exposure. Together with corp bonds, it's equivalent to about 180% of synthetic stock held with IG. So not really possible unless I hit my brain and decide to leverage up significantly. As I said I am not sure whether this is the best set up (perhaps it's cheaper through options/CFD) but it does generate about 40-50% more income (6.5% running yield, versus roughly 4% if I had a more traditional 80/20 equity/bond portfolio) with less volatility (so far, it all depends on p2p dependability*) with very little, if any, tax to pay. *I had a hiccup once, aons ago, with Icesave freezing my funds allocated for margin. Luckily I had index-linked gilts which I managed to sell just in time. So various investments/asset classes, even if risky on their own, actually should add up to a less risky portfolio overall in the end, one would hope. And a little cheap leverage can go a long way IMHO. Comments welcome. vi123
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