Sometimes it even makes sense to borrow at a high interest rate, if the loan is for a short term; you may still end up dollars ahead. It may be worthwhile to borrow money at the best interest rates for the purpose of investing in high yield investments. This allows you to use the leverage of borrowed money which you pay back with the money earned from the higher yield investment. If the investment is pledged for security, you may be able to reduce the rate of interest calculation, since the loan is fully secured. Also this is a method of forced savings, because you will be committed to repaying the loan. And remember, the interest cost on loans for investment purposes is deductible for income tax purposes in most jurisdictions.
Let’s look at a couple of examples. You want to buy a $200,000 house as a rental property. You have the 25% down payment of $50,000 and you want to borrow $150,000 and the lowest mortgage rate right now is say 5%, so the mortgage costs you $875 per month. Now with a rental property you also have other expenses – property taxes $100 per month, Vacancy allowance of $75 per month, maintenance allowance of $75 per month, management fee of $50 per month and property insurance of $50 per month. This would total $ 1200 per month in expenses. So the question is can you get $1200 or more per month in rent? If the answer is yes, it would make sense to buy it, if you plan to hold it for the long term. You would now own an appreciating property, where you have leveraged your down payment four to one. Your biggest asset of course is your tenant who pays the rent every month and keeps an eye on the place for you. And over the years the rents should go up giving you a positive cash flow. Makingcentsaddup
Here’s another example. Let’s say you have $800 in your savings account and you are adding to the account $100 per month. Your broker tells you about some high quality corporate bonds and the bonds interest rates are at 9.65%. To meet the purchase of the bond you need $1025 plus accrued interest. The question is – should you borrow $300 from the bank repaying $100 per month and buy the bond now? If you leave your money at a 6% savings account interest, you could earn $15 in interest. If you buy the bond you will earn – the interest on the bond investment of $24.73 (3 months) minus the bank interest rate of 13% of $6.50 leaving you $18.23. Since this is more than the savings interest it would make sense to borrow money to buy the bond now in order to increase the return on your money.