Holding Mortgage + investing in taxable = leveraged investing?

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ChinchillaWhiplash
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Holding Mortgage + investing in taxable = leveraged investing?

Post by ChinchillaWhiplash »

Is there a good way to figure out exactly how much you are using leverage when you have a mortgage but choose to put extra cash flow into taxable investments over paying extra on the mortgage? Guessing have to figure in after tax interest paid for mortgage if using itemized deductions. How do you calculate how much you are gaining by going this route? 3.875% mortgage fixed. 32% Fed tax bracket after all deductions.
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geerhardusvos
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by geerhardusvos »

ChinchillaWhiplash wrote: Fri Mar 26, 2021 7:20 pm Is there a good way to figure out exactly how much you are using leverage when you have a mortgage but choose to put extra cash flow into taxable investments over paying extra on the mortgage? Guessing have to figure in after tax interest paid for mortgage if using itemized deductions. How do you calculate how much you are gaining by going this route? 3.875% mortgage fixed. 32% Fed tax bracket after all deductions.
I personally see a mortgage more like a negative bond. Not so much leverage.

This article might be interesting to you: https://www.madfientist.com/mortgage-payoff-experiment/
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jeffyscott
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by jeffyscott »

Wouldn't the amount of leverage just be based on the balances?

For example, if you have a $100K in taxable and a mortgage balance that equals or exceeds that, then you have borrowed $100K in order to invest it. If your total portfolio is $1 million, then 10% of that is leveraged.
bling
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by bling »

ChinchillaWhiplash wrote: Fri Mar 26, 2021 7:20 pm 3.875% mortgage fixed.
refinance? rates have been creeping up but you should still be able to get a 30yr in the high 2s.
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by Kenkat »

I would say yes, you are leveraged, BUT...

Let’s say that instead of having a mortgage you are renting your home. Are you still leveraged? What’s different about having a future rent payment obligation vs. having a future mortgage payment obligation? Yes, I get that you can move if you rent, but unless you want to live in your car, you are just trading one rent obligation for another. You have a payment obligation that looks a lot like a “negative bond” payment regardless of rent or own. So whether you call it leveraged or a negative bond or whatever is fine I suppose, but it’s not the real decision point here in my opinion.

in general, if your after tax return on your investments is greater than your after tax interest rate on the mortgage, it can make sense to have both a mortgage and taxable investments. You have to manage cash flow, risk, liquidity, etc. so you don’t default on the mortgage, but otherwise it can make sense.
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ChinchillaWhiplash
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by ChinchillaWhiplash »

bling wrote: Sat Mar 27, 2021 8:49 am
ChinchillaWhiplash wrote: Fri Mar 26, 2021 7:20 pm 3.875% mortgage fixed.
refinance? rates have been creeping up but you should still be able to get a 30yr in the high 2s.
Currently have 18 yrs left on 20 yr and have it down close to non-jumbo. Thinking about a refi once it’s down enough.
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by DB2 »

I recently refi'd on my home. I did a 30-year at 2.62% (coming from 4.5% at 25 yrs left). I'm saving about $500 a month in interest and will be using it toward investing. I am still going to be working another 15-20 years and I do not plan on living here when I retire (likely will move before then). But even a very modest return would put me ahead and allow me to pay off the house off early if I changed my mind and walk away with money in 20 years.
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by watchnerd »

ChinchillaWhiplash wrote: Fri Mar 26, 2021 7:20 pm Is there a good way to figure out exactly how much you are using leverage when you have a mortgage but choose to put extra cash flow into taxable investments over paying extra on the mortgage? Guessing have to figure in after tax interest paid for mortgage if using itemized deductions. How do you calculate how much you are gaining by going this route? 3.875% mortgage fixed. 32% Fed tax bracket after all deductions.
Back when I used to have a mortgage, I never tried to frame it as how much leverage was being used to buy stocks, as that's rather academic.

The ROI numbers are comparing the guaranteed modest return on paying your mortgage down vs what you think you'll get in the market.
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A-Commoner
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by A-Commoner »

Thanks for the post. I’m wondering the same thing.

In 2017, I bought a $1m house in LA. Would have paid cash for it but I took advantage of the 3.6% 30 yr fixed mortgage rate that was very good at that time. Paid a 20% down payment. Today the house is valued at $1.25m based on recent sales in our subdivision.

So, ignoring taxes and cost of maintenance to simplify things, the $200k I put down returned $250k (more than doubled) in 3.5 years.

But the other $800k of liquid assets I had was also invested in a diversified stock-bond portfolio that returned 10.2% annually over those 3.5 years. $800k is now $1.123 m. A gain of 323k.

So that’s 250 + 323 = $573k on a 200k investment. Is this the correct way to look at it? Or is it a 573k gain on a $1 million investment?
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by willthrill81 »

Yes, holding any type of debt while simultaneously investing is leverage. That's not an opinion or a viewpoint; it's a mathematical reality that can easily be demonstrated to be so.

That said, leverage is not evil. Rather, in some situations (e.g., young accumulator), it makes very good sense to use some leverage.

Nevertheless, earning a guaranteed 3.875% after-tax return (i.e., paying down/off the mortgage) is close to impossible to beat these days. Stocks might outperform that, but if they do, it will likely be with significant volatility that may or may not work out in your favor. But it's extremely unlikely that any fixed income that doesn't include significant risk will outperform that.

So if you want to hold on to the mortgage to buy stocks or you want to pay down/off the mortgage early, you're on mathematically justifiable ground. But if you're holding the mortgage to buy fixed income that's paying far less, there is little to no mathematical justification unless you need the liquidity that the fixed income provides.
Last edited by willthrill81 on Sun Mar 28, 2021 1:51 pm, edited 1 time in total.
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by rockstar »

A-Commoner wrote: Sun Mar 28, 2021 1:34 pm Thanks for the post. I’m wondering the same thing.

In 2017, I bought a $1m house in LA. Would have paid cash for it but I took advantage of the 3.6% 30 yr fixed mortgage rate that was very good at that time. Paid a 20% down payment. Today the house is valued at $1.25m based on recent sales in our subdivision.

So, ignoring taxes and cost of maintenance to simplify things, the $200k I put down returned $250k (more than doubled) in 3.5 years.

But the other $800k of liquid assets I had was also invested in a diversified stock-bond portfolio that returned 10.2% annually over those 3.5 years. $800k is now $1.123 m. A gain of 323k.

So that’s 250 + 323 = $573k on a 200k investment. Is this the correct way to look at it? Or is it a 573k gain on a $1 million investment?
You'd have to back out expected selling costs for the real estate.
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by cos »

Just so you know, holding a mortgage and investing in tax-advantaged accounts is also leveraged investing.
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by firebirdparts »

I think it's the wrong question entirely, and the amount of leverage is uninteresting. If you hold a negative bond and a positive bond, they just cancel. If you hold a negative bond and say 100% stocks, then just look at the amount you have invested in stocks. That number is inclusive of the "effect" of having a mortgage, whatever the effect might be. You could say "If I paid my mortgage, I'd have to sell all these stocks" but that's not really interesting until you actually do it.
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by gtwhitegold »

I do agree that having a mortgage is leverage, but I disagree with the idea that holding any bonds at all while having debt is ill advised. Having fixed income and cash gives you optionality that you otherwise would not have. It allows you to pay for unexpected costs without incurring additional debt. It also gives you the ability to rebalance into stocks if they are down.

How I draw the line between investing and paying off debt is if the expected return of your portfolio minus one percent is greater than the expected cost of your highest interest debt, then it is still logical to invest.

People could also be in the situation where they invested well beyond their risk tolerance or risk capacity because of what they have read on this forum. Many people carry a mortgage into retirement, and I don't think that more than a few people here on the forum would suggest that someone should be one hundred percent equities heading into retirement unless the value of his or her portfolio was multiple times the value required if one invested in a more standard portfolio.
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by SuperTrooper87 »

rockstar wrote: Sun Mar 28, 2021 1:50 pm
A-Commoner wrote: Sun Mar 28, 2021 1:34 pm Thanks for the post. I’m wondering the same thing.

In 2017, I bought a $1m house in LA. Would have paid cash for it but I took advantage of the 3.6% 30 yr fixed mortgage rate that was very good at that time. Paid a 20% down payment. Today the house is valued at $1.25m based on recent sales in our subdivision.

So, ignoring taxes and cost of maintenance to simplify things, the $200k I put down returned $250k (more than doubled) in 3.5 years.

But the other $800k of liquid assets I had was also invested in a diversified stock-bond portfolio that returned 10.2% annually over those 3.5 years. $800k is now $1.123 m. A gain of 323k.

So that’s 250 + 323 = $573k on a 200k investment. Is this the correct way to look at it? Or is it a 573k gain on a $1 million investment?
You'd have to back out expected selling costs for the real estate.
Would you also have to subtract the costs of interest payments made on the mortgage over the last 3-4 years? (If paid in cash obviously no interest paid).
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Re: Holding Mortgage + investing in taxable = leveraged investing?

Post by rockstar »

SuperTrooper87 wrote: Sun Mar 28, 2021 10:29 pm
rockstar wrote: Sun Mar 28, 2021 1:50 pm
A-Commoner wrote: Sun Mar 28, 2021 1:34 pm Thanks for the post. I’m wondering the same thing.

In 2017, I bought a $1m house in LA. Would have paid cash for it but I took advantage of the 3.6% 30 yr fixed mortgage rate that was very good at that time. Paid a 20% down payment. Today the house is valued at $1.25m based on recent sales in our subdivision.

So, ignoring taxes and cost of maintenance to simplify things, the $200k I put down returned $250k (more than doubled) in 3.5 years.

But the other $800k of liquid assets I had was also invested in a diversified stock-bond portfolio that returned 10.2% annually over those 3.5 years. $800k is now $1.123 m. A gain of 323k.

So that’s 250 + 323 = $573k on a 200k investment. Is this the correct way to look at it? Or is it a 573k gain on a $1 million investment?
You'd have to back out expected selling costs for the real estate.
Would you also have to subtract the costs of interest payments made on the mortgage over the last 3-4 years? (If paid in cash obviously no interest paid).
I agree. Your investments have to grow faster than your interest rate after taxes.
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