Don't Take Out Mortgages To Invest In Securities
With a recovering financial market, significantly reduced interest rates, and enhanced earnings in home value, a number of investors are taking out new mortgages, refinanced, or procured credit lines secured by their homes to specifically engage actively securities investments. This with the intention of the investment not only paying the mortgage, but also producing augmented income. Regrettably, that is not always the case.
This alert is being issued due to the Foreign Investment Commission’s concern for investors who entirely rely on investment earnings to address mortgage obligations that could end up failing to meet deadlines on their home loans if their investments deteriorate and they are unable to catch up with regular mortgage obligations. This alert outlines the risks involved in engaging in this investment with the equity in your home, providing guidance to the investor prior to making such an investment decision.
With the risk compounded, the investor should understand that such is the case when investing in almost any security. Obtaining funding out of mortgages to purchase securities complicates risk.
When purchasing securities with mortgage funds, it is investing with loaned funds. While such move improves purchasing power, it also opens up exposure to market risk, the same as purchasing securities on margin. The disparity is that mortgage loan is likely to be greater than any amount a securities firm would loan on margin. Investing borrowed mortgage funds is like pegging a huge bet that the investment will likewise grow.
In contrast to investing with savings, when investing with mortgage funds, the investor stands to exhaust more than the principal if the investment doesn’t do very well. The investor can drop the collateral sustaining the loan, in this case the house. Even when the investor doesn't lose the house, the equity could be lost in the mortgage that may have grown in the substantial investment phase.
The investor may invest money in likely risky investments than might usually be an option, in an attempt not only to address the rate of the home loan but with the intention of beating this rate. Additionally, with such risk exposure, if a given investment proves to have low productivity, the investor may feel obliged to move the investment into even more risky investments to make up the requirements, further endangering home ownership, credit standing, and overall financial wellness.
If the investments advisor or broker suggests this strategy, it all boils down to one very basic question. Prior to taking out a mortgage or refinancing to invest in securities, you should be able to answer this question: What will I do if my investments perform poorly? Will I be able to secure funds to address mortgage payments if such investments lose value? If the answers to these questions are hard to get by, then investing in securities with this strategy is not for you.
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