10 ms·

You could if you wanted to, though for whatever reason people are much more comfortable with leveraging 5x to purchase a home than they are with leveraging 5x t

by wocram 7y ago

You could if you wanted to, though for whatever reason people are much more comfortable with leveraging 5x to purchase a home than they are with leveraging 5x to invest in a brokerage account.

asdfasgasdgasdg 7y ago
> You could if you wanted to Not really. There are no margin accounts with terms as favorable as the typical mortgage loans. (Some examples of terms mortgages have that margin loans don't: the absence of margin calls, the low interest rates, the relative diversity and transparency of rates from potential lenders, etc.)
- User23 7y ago
  You can get margin rates as low as a mortgage or even substantially lower[1]. If you don't want to switch brokers you can also ask your current broker for a discounted margin rate. I've heard anywhere from $250k to $1m total assets is enough for them to consider discounts. However, margin calls are a lot more terrifying than foreclosure proceedings, that's for sure. As such, it's virtually imperative to appropriately hedge and that should be factored into the cost of borrowing. [1] https://www.interactivebrokers.com/en/index.php?f=18069 https://www.interactivebrokers.com/en/index.php?f=18069
  - asdfasgasdgasdg 7y ago
    I was unaware that IB's rates are so low. From reading about it, it looks like they make the money back on other fees, including inactivity fees and commissions. So the real rate is not really as low as what it says, although I suppose on large accounts those fixed fees would make up only a small fraction of the total value. Either way, I was wrong about there being "no" options with interest terms as favorable as mortgages. There is plainly at least one. Your point about hedging is well-taken, also.
- jdashg 7y ago
  Margin calls are the primary difference. (InteractiveBrokers and Robinhood have pretty good margin rates: <=3.05% and ~5% respectively) Being forced to sell at during a temporary low is the major threat, whereas most people who kept their house during 2008-2009 are doing fine today.
  - refurb 7y ago
    That's true for the US market, but what I learned is a "margin call" is a potential scenario in Canada. Unlike the US, mortgages typically have 5 year terms (can range from 1 to 10). The amortization period is still 25 years (on average), but you refinance every 5 years. If you put 20% down on a house, which then loses 10% of it's value, you can't refinance without coughing up enough cash to have the loan be 80% of the appraisal. As you said, at least in the US you can choose to ride out a crash if you have a 30 year fixed mortgage.
    - astura 7y ago
      During the housing crisis in the US a lot of mortgages were ARMs, which are basically the same thing as your describing. https://www.cbsnews.com/news/adjustable-rate-mortgages-make-a-comeback/ https://www.cbsnews.com/news/adjustable-rate-mortgages-make-...
usaar333 7y ago
A housing loan is far less risky than a 5x margin position as they are structurally different types of loans: * The housing loan is non-recourse (you can't lose more than your home), while brokerage is not. * A housing loan's collateral value is only determined at purchase, not hourly. You can't get "margin called" on your house if its value declines. All said, I'll give you that people are oddly leverage-adverse when it comes to brokerages and actually take on more risk (to achieve a given expected return) than they need to if they were willing to use light (10-20%) leverage.
Slartie 7y ago
Nah, it is indeed much easier to invest in real estate on 5-10x leverage than doing the same with stocks or ETFs, because the banks are usually much more comfortable lending you the money in the first case. I think it's because of the mind trickery that makes the first thing a solid "buying a house" investment and the second thing a "gambling on the stock market" game. You can easily see that trickery at work: just confront someone who bought a house on credit with the fact that he just put all his money into a highly leveraged single investment, which combines two of the usual "don'ts" from the "Investment for Dummies" book. You will usually earn blank stares. Not saying that doing such an investment doesn't make sense in certain circumstances (use the house yourself and plan on staying there for decades), but one should be very clear about the risk profile of it.
- phatfish 7y ago
  This seems to be the benefit to me as well. The average person won't get a £100,000+ loan from a bank so easily for anything else. Want to start a business with that money? Better have a rock solid business plan. Investing elsewhere? No chance, a bank won't lone that money for you to play with on the stock market, and the rate you would get would wipe out any gains from something safer like a tracker fund. For anyone that is not content living in the same area for the rest of their life buying is a poor decision. But it is the only way most people can access a loan that size and leverage in that way. I've resigned myself to the fact you have to buy (in my country at least), and I will just make sure it can be rented easily when I want to move. Some European countries are much more renter friendly and I would consider renting exclusively there. Germany and Berlin seem more appealing in that regard with the rent control that was put into place recently.
  - scarby2 7y ago
    The thing is housing almost comes with a rock solid business plan and as a basic need is somewhat resistant to radical decreases in price (it is almost impossible that your house would depreciate by 100% - company stock/your own business investments could). With the way the market is it is likely that mortgage principal + interest + maintenance is actually less than rent...
fredophile 7y ago
Real estate isn't a very volatile asset class. Using leverage in more volatile asset classes, like FOREX, is where people run into big problems very quickly. Your bank will also make you buy insurance if you're getting a mortgage with more than 5x leverage. Good luck finding anyone that would insure your stock picking at 10x leverage.
- Slartie 7y ago
  > Real estate isn't a very volatile asset class. This conventional wisdom has been increasingly getting less true over the last decade. Valuation increases of 5-10% per year on a regular basis are also "volatility".
  - magicalhippo 7y ago
    My home will not depreciate much relative to other homes I could have bought. Yes I'm forced to sell during a downturn it's not good, but once the market picks up it's almost certain my home will increase in value as well. Harder to have the same confidence that the stocks I picked will survive a downturn as well as my home.
    - jdsully 7y ago
      All your arguments of safety are even more applicable to index funds since you actually own a slice of the entire market rather than just being merely correlated as you are with your house.
slumdev 7y ago
5x? Amateur. I put 3% down when I bought my house. That's 30x leverage. The difference is that my lender wouldn't call the note on my house if the value of the home dropped below the principal still owed. Not if they want to see the money, anyway.
throwaway100773 7y ago
You don’t get margin calls with a house. You just have to make the mortgage payments.
- chii 7y ago
  a margin call is the same as a foreclosure. You prevent margin calls if you put in your own money (to boost the margin). A broker margin calls you because they no longer accept the raised risk, but it's the same concept.
  - throwaway100773 7y ago
    A margin call is not the same as a foreclosure. It’s quite different. You have a fixed payment with a mortgage. If the value of your house declined precipitously, that fixed payment stays the same. You enter foreclosure proceedings only if you cannot make that payment, and depending on the state, this takes some time. You might be living in your house for a year or more without making a payment while in foreclosure. On the other hand, with a leveraged position in the market, if the value of your portfolio falls to a certain level, you either need to post more capital or your position is liquidated. If you are capital constrained, there is literally nothing you can do in the case of a leveraged position - your broker forces you out. Regardless, if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value. This is the big difference.
    - chii 7y ago
      > if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value. it's the same coin, you're just looking at it from a different angle. The timeframes are certainly different between foreclosure and margin calls, but the concept is the same - the lender sees you as more risky than they originally intended, and chooses to liquidate you. In a foreclosure, you "prevent it" by constantly paying the interest. In a margin call, you are not paying until you hit the drop in valuation, and you have to pay to top it back up.

by wocram 7y ago

You could if you wanted to, though for whatever reason people are much more comfortable with leveraging 5x to purchase a home than they are with leveraging 5x to invest in a brokerage account.

asdfasgasdgasdg 7y ago

> You could if you wanted to Not really. There are no margin accounts with terms as favorable as the typical mortgage loans. (Some examples of terms mortgages have that margin loans don't: the absence of margin calls, the low interest rates, the relative diversity and transparency of rates from potential lenders, etc.)

User23 7y ago
You can get margin rates as low as a mortgage or even substantially lower[1]. If you don't want to switch brokers you can also ask your current broker for a discounted margin rate. I've heard anywhere from $250k to $1m total assets is enough for them to consider discounts. However, margin calls are a lot more terrifying than foreclosure proceedings, that's for sure. As such, it's virtually imperative to appropriately hedge and that should be factored into the cost of borrowing. [1] https://www.interactivebrokers.com/en/index.php?f=18069 https://www.interactivebrokers.com/en/index.php?f=18069
- asdfasgasdgasdg 7y ago
  I was unaware that IB's rates are so low. From reading about it, it looks like they make the money back on other fees, including inactivity fees and commissions. So the real rate is not really as low as what it says, although I suppose on large accounts those fixed fees would make up only a small fraction of the total value. Either way, I was wrong about there being "no" options with interest terms as favorable as mortgages. There is plainly at least one. Your point about hedging is well-taken, also.
jdashg 7y ago
Margin calls are the primary difference. (InteractiveBrokers and Robinhood have pretty good margin rates: <=3.05% and ~5% respectively) Being forced to sell at during a temporary low is the major threat, whereas most people who kept their house during 2008-2009 are doing fine today.
- refurb 7y ago
  That's true for the US market, but what I learned is a "margin call" is a potential scenario in Canada. Unlike the US, mortgages typically have 5 year terms (can range from 1 to 10). The amortization period is still 25 years (on average), but you refinance every 5 years. If you put 20% down on a house, which then loses 10% of it's value, you can't refinance without coughing up enough cash to have the loan be 80% of the appraisal. As you said, at least in the US you can choose to ride out a crash if you have a 30 year fixed mortgage.
  - astura 7y ago
    During the housing crisis in the US a lot of mortgages were ARMs, which are basically the same thing as your describing. https://www.cbsnews.com/news/adjustable-rate-mortgages-make-a-comeback/ https://www.cbsnews.com/news/adjustable-rate-mortgages-make-...

usaar333 7y ago

A housing loan is far less risky than a 5x margin position as they are structurally different types of loans: * The housing loan is non-recourse (you can't lose more than your home), while brokerage is not. * A housing loan's collateral value is only determined at purchase, not hourly. You can't get "margin called" on your house if its value declines. All said, I'll give you that people are oddly leverage-adverse when it comes to brokerages and actually take on more risk (to achieve a given expected return) than they need to if they were willing to use light (10-20%) leverage.

Slartie 7y ago

Nah, it is indeed much easier to invest in real estate on 5-10x leverage than doing the same with stocks or ETFs, because the banks are usually much more comfortable lending you the money in the first case. I think it's because of the mind trickery that makes the first thing a solid "buying a house" investment and the second thing a "gambling on the stock market" game. You can easily see that trickery at work: just confront someone who bought a house on credit with the fact that he just put all his money into a highly leveraged single investment, which combines two of the usual "don'ts" from the "Investment for Dummies" book. You will usually earn blank stares. Not saying that doing such an investment doesn't make sense in certain circumstances (use the house yourself and plan on staying there for decades), but one should be very clear about the risk profile of it.

phatfish 7y ago
This seems to be the benefit to me as well. The average person won't get a £100,000+ loan from a bank so easily for anything else. Want to start a business with that money? Better have a rock solid business plan. Investing elsewhere? No chance, a bank won't lone that money for you to play with on the stock market, and the rate you would get would wipe out any gains from something safer like a tracker fund. For anyone that is not content living in the same area for the rest of their life buying is a poor decision. But it is the only way most people can access a loan that size and leverage in that way. I've resigned myself to the fact you have to buy (in my country at least), and I will just make sure it can be rented easily when I want to move. Some European countries are much more renter friendly and I would consider renting exclusively there. Germany and Berlin seem more appealing in that regard with the rent control that was put into place recently.
- scarby2 7y ago
  The thing is housing almost comes with a rock solid business plan and as a basic need is somewhat resistant to radical decreases in price (it is almost impossible that your house would depreciate by 100% - company stock/your own business investments could). With the way the market is it is likely that mortgage principal + interest + maintenance is actually less than rent...

fredophile 7y ago

Real estate isn't a very volatile asset class. Using leverage in more volatile asset classes, like FOREX, is where people run into big problems very quickly. Your bank will also make you buy insurance if you're getting a mortgage with more than 5x leverage. Good luck finding anyone that would insure your stock picking at 10x leverage.

Slartie 7y ago
> Real estate isn't a very volatile asset class. This conventional wisdom has been increasingly getting less true over the last decade. Valuation increases of 5-10% per year on a regular basis are also "volatility".
- magicalhippo 7y ago
  My home will not depreciate much relative to other homes I could have bought. Yes I'm forced to sell during a downturn it's not good, but once the market picks up it's almost certain my home will increase in value as well. Harder to have the same confidence that the stocks I picked will survive a downturn as well as my home.
  - jdsully 7y ago
    All your arguments of safety are even more applicable to index funds since you actually own a slice of the entire market rather than just being merely correlated as you are with your house.

slumdev 7y ago

5x? Amateur. I put 3% down when I bought my house. That's 30x leverage. The difference is that my lender wouldn't call the note on my house if the value of the home dropped below the principal still owed. Not if they want to see the money, anyway.

throwaway100773 7y ago

You don’t get margin calls with a house. You just have to make the mortgage payments.

chii 7y ago
a margin call is the same as a foreclosure. You prevent margin calls if you put in your own money (to boost the margin). A broker margin calls you because they no longer accept the raised risk, but it's the same concept.
- throwaway100773 7y ago
  A margin call is not the same as a foreclosure. It’s quite different. You have a fixed payment with a mortgage. If the value of your house declined precipitously, that fixed payment stays the same. You enter foreclosure proceedings only if you cannot make that payment, and depending on the state, this takes some time. You might be living in your house for a year or more without making a payment while in foreclosure. On the other hand, with a leveraged position in the market, if the value of your portfolio falls to a certain level, you either need to post more capital or your position is liquidated. If you are capital constrained, there is literally nothing you can do in the case of a leveraged position - your broker forces you out. Regardless, if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value. This is the big difference.
  - chii 7y ago
    > if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value. it's the same coin, you're just looking at it from a different angle. The timeframes are certainly different between foreclosure and margin calls, but the concept is the same - the lender sees you as more risky than they originally intended, and chooses to liquidate you. In a foreclosure, you "prevent it" by constantly paying the interest. In a margin call, you are not paying until you hit the drop in valuation, and you have to pay to top it back up.