Would it make sense to borrow to invest in ASX shares?
The big banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) love to lend to property investors.
But there seems to be much less appetite for borrowing for shares. Shares are more volatile and harder to understand and harder to create a uniform lending criteria for.
Leverage is the biggest reason why property returns can look so good to people. So why not do the same thing with shares? In percentage terms, shares have proven to be the best performing asset, think how good it would be if you could supercharge that with leverage?
Well, there are several reasons to be cautious about borrowing for shares.
A lot of loans that could be used to invest in shares have a much higher interest rate than a mortgage. Shares may have returned an average of 10% per annum over the long-term and the loan interest rate may be lower than that, but don't forget you probably have to pay tax on the capital gains you make and dividends you receive. It may not even be worth it financially unless you're a great stock picker.
Life doesn't work like a spreadsheet. Sometimes there are recessions and market crashes. This can be terrible if you have something like a margin loan and you're forced to sell at precisely the wrong time.
Loans can magnify both the gains and the losses.
Of course, if you borrow and invest in the right shares and at the right time then it can work out really well. Imagine if you could borrow and invest during the GFC! But borrowing comes with risks, you need to make the repayments and it's possible you may borrow too much.
Foolish takeaway
Whilst borrowing for shares may make sense on a spreadsheet, I'd much rather stay debt free and just invest cash into ASX shares.
