is it good idea to use redraw on mortgage to invest in stocks

Using a home equity line of credit (HELOC) or a mortgage redraw or simply home equity facility to invest in stocks during a market crash is a financial decision that carries significant risks and should be approached with caution. But if you get it right, you can make great returns.

Home equity example

If you own a house worth $500k and outstanding debt is say $200k, your home equity is worth $300k. So basically you can get this money from bank at low interest rate and invest it in Market to make big returns.

Redraw example

If you own a house worth $500k and you owe $400k to bank. After some time, you prepaid $100k towards the home loan. Since you have paid extra $100k, outstanding debt is now at $300k. After 3 years, you need some cash. So you can access $100k via redraw facility!!

Advantages

1. Lower Interest Rates: Mortgage loans typically have lower interest rates compared to other types of loans or credit, such as credit cards or personal loans. If you can secure a low-interest rate through a HELOC or mortgage redraw, borrowing funds may be more cost-effective.

2. Potential for Gains: Investing in stocks during a market crash can provide an opportunity to purchase assets at lower prices. If the market rebounds, you may benefit from potential capital appreciation.

e.g. If you had borrowed and invested during 2020 Covid crash, you could have made good returns.

Disadvantages

1. Leverage Risk: Using borrowed money to invest in the stock market is a form of leverage. While leverage can amplify gains during market upswings, it can also magnify losses during downturns. If the market continues to decline, you may face substantial losses, including the risk of losing your invested capital and having to repay the borrowed funds with interest.

2. Interest Costs: Even if the stock market rebounds, you will still need to repay the borrowed funds, often with interest. If your investments do not generate returns that exceed the cost of borrowing, you may end up in a financial deficit.

3. Market Volatility: Market crashes can be highly volatile and unpredictable. It's essential to have a well-thought-out investment strategy and risk management plan in place. e.g. Nasdaq 100 index was almost flat from 2000 to 2015. If you had put your money at the peak of 2000, you would have 0% returns after 15 years. But remember that since you had purchased the stocks via borrowed money, you would still need to pay interest along with principal. So it is a huge loss.

4. Asset Security: When you use your home as collateral for a HELOC or mortgage redraw, you are putting your home at risk. If your investments do not perform well, you could face financial challenges and potentially the risk of losing your home if you cannot meet your loan obligations.

5. Diversification: Investing in the stock market, especially during a market crash, can be risky. Diversifying your investment portfolio across different asset classes can help mitigate risk. Relying solely on stock investments can expose you to significant market fluctuations.