| Better to borrow than to sell stocks? |
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wgilder
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| Better to borrow than to sell stocks? |
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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
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Fri Sep 27, 2013 3:03 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
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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)
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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?
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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...
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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.
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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...
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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?
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Sat Sep 28, 2013 12:50 am |
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