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Better to borrow than to sell stocks?

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wgilder
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Better to borrow than to sell stocks?  Reply with quote  

Question: Are there times when it make sense to take out a loan rather than liquidating assets? In general I'm rather conservative financially, but our current situation makes me wonder. Consider:


  • We (my wife and I) live in Germany and are subject to German taxes
  • I have stock options from my current employer (a US company)
  • German tax code treats bought-and-sold stock options as income (buying-and-holding also has serious tax implications)
  • Around half of the profit from selling my options (42%-57%, depending on various factors) would be lost to tax
  • It may be possible in the future to move to the US for a year, potentially only having to pay capital gains on the options, resulting in 50%+ less tax


We need around 35k by February for a house purchase, so are thinking about taking out a low-interest 5-yr loan rather than liquidating the rest of the stocks. Is this crazy talk?

By the by, our combined incomes are large enough to easily handle the new mortgage + loan payments. This is really more a question about how sound philosophically this is.

I'm a US citizen, my wife German.

Thank you in advance,

Walter
Post Fri Sep 27, 2013 3:03 pm
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coaster
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I don't understand which option you are asking "is this crazy talk?" It seems to me to be obvious. Yet, the way you have worded your question implies you think taking out the loan is the crazy option. Please clarify?

~Tim~
Post Fri Sep 27, 2013 3:31 pm
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wgilder
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Hi Tim,

So for you it's obvious that we should take out the loan? You can see that's a difficult step for me--I have it so ingrained in me to prefer the debt-less path when given options...

Walter
Post Fri Sep 27, 2013 3:36 pm
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littleroc02us
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Sounds like to me you shouldn't buy the home if you have to sell stock @ a 40% or something crazy like that. Don't do it. Save up a DP of 20% with cash. It's the only conservative, wise thing to do.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Fri Sep 27, 2013 4:09 pm
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oldguy
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quote:
We need around 35k by February for a house purchase, so are thinking about taking out a low-interest 5-yr loan rather than liquidating the rest of the stocks.


Can you give us more details? Eg, is the $35k to be part of a $70k down payment on a $500k house? Or is $35k most of the house value (small apt)? And is this a longterm home for you (25 yrs) or a 2 or 3 yr home while in Germany?

In the US we get <5% fixed rate 30 year loans - that turns out to be some of the lowest cost longterm capital in the world. I borrow against our real estate and invest that cash in an Index Fund that historically outpaces 5% by a substanial margin. From what I've read, that type of longterm capital is unavailable in the EU - but what is available to you?
Post Fri Sep 27, 2013 4:25 pm
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wgilder
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It's a 338,00 (apr. $450,000) single-family house. We got a 15 year, 2.5% loan w/ 15% down (around $65 k). Besides the down payment, we incur the following expenses:

  • Notary fees: $2,000
  • Taxes: $20,000
  • Other fees: $2,000
  • Moving expenses, inc. painting, minor repairs, movers: $6,000


So we're looking at around $100,000 out-of-pocket. We're able to cover most, just have a gap of around $30k or so. (Depends on 2013 taxes, ability to save money between now and Feb. when the downpayment is due, etc.)

In retrospect, I wish we'd gone for 10% down, but there you go...
Post Fri Sep 27, 2013 4:54 pm
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oldguy
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quote:
So we're looking at around $100,000 out-of-pocket. We're able to cover most, just have a gap of around $30k or so. (Depends on 2013 taxes, ability to save money between now and Feb. when the downpayment is due, etc.)

In retrospect, I wish we'd gone for 10% down, but there you go...


Yes, that $22,500 loan for 2.5% for 15 years would have been a winner. But the low interest 5 yr loan seems like the obvious fall-back plan. BTW, what does "low interest" turn out to be?

IMO, anytime you can borrow sub-5% longterm capital it makes sense to keep your own money working for you elsewhere - ie, place your money at its 'highest & best use' and let the power of compounding work.
Post Fri Sep 27, 2013 6:28 pm
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wgilder
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quote:
Originally posted by oldguy
BTW, what does "low interest" turn out to be?


I've seen display-window rate of 5.69% for an unsecured, 60 month loan from Barclaycard. A bit higher than your 5% limit, but it still seems like it might be worth it...
Post Fri Sep 27, 2013 9:13 pm
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oldguy
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quote:
but it still seems like it might be worth it...


I would do it - in fact I am doing it, I have some 5.75% money, borrowed for the purpose of investing it at 11%.

Is that 2.5% 15 yr baked in the cake, or is trhere a way to renogotiate it before Feb?
Post Sat Sep 28, 2013 12:50 am
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coaster
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quote:
Originally posted by wgilder
Hi Tim,

So for you it's obvious that we should take out the loan? You can see that's a difficult step for me--I have it so ingrained in me to prefer the debt-less path when given options...

Walter

Yes, and also I know our members well enough I know what their responses are going to be to such a question; but regardless of all that, the first principal of finance is that you look at the net: what is the net cost to you to capitalize your plan? Borrowing as your source of capital is the finance cost; selling assets as your source of capital costs you all the lost future growth and income, plus the taxes paid. If you borrow, the principal is the amount of capital needed; if you sell assets, the principal is the proceeds *plus* the taxes paid. In either case, to get back to even, you have to repay the principal.

Just visualize that and you don't even need to do any math. Smile

~Tim~
Post Sat Sep 28, 2013 5:01 am
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