It was just over two years ago that I first decided to use a margin loan to buy a multimillion pound Dream Home. It seems I’m one of very few folks, worldwide, to explicitly make this decision. So how’s it turned out? This post describes my journey so far. If you have no interest in margin loans or debt then this post isn’t for you – be warned.
What was I thinking?
The full story of that house purchasing whim is told in various posts (starting here), but it’s worth recapping a moment on my logic for using a margin loan.
The decision to buy the Dream Home arose very suddenly. I am not joking when I say it was a whim. All I knew for sure when I committed to the transaction was that I had liquid assets of a value significantly in excess of the Dream Home™, and that a mortgage wouldn’t be of much use to me. So I assumed that I could, worst case, sell assets to raise the funds necessary.
I needed to raise about 110% of the value of the Dream Home, to cover the purchase price, the stamp duty, and transaction costs.
My plan was to sell my Previous House shortly after buying the Dream Home (but not in a chain transaction). I assumed the Previous House was worth about 60% of the Dream Home. I also assumed the Previous House would be difficult to sell until after the Brexit referendum was behind us, at which point we would be safely confirmed as remaining in the EU. Hah. But even in my fantasy scenario, there were going to be many months between the purchase of the Dream Home and any sale of the Previous House, so I needed to ignore the Previous House when finding funds to complete the Dream Home transaction.
At around the same time, I was also expecting a windfall sum from the partial sale of one of my illiquid investments. This sum was going to be more than enough to pay for the stamp duty, i.e. a very significant windfall, of over 10% the value of the Dream Home. But I didn’t have control over the transaction timing and I knew that the deal could be delayed by weeks/months or, worse still, derail completely.
So, in crude terms, I thought that I could, over a few months and with a bit of risk, find about 70% of the ~110% I needed without needing to touch my portfolio, and that the balance of about 40% would come from liquidating a suitable slug of my portfolio. But in the meantime I would need to find potentially all 110% by liquidating the portfolio; this was going to be painful, but, hey, wasn’t the whole point of my liquidity-seeking investment strategy to be able to use the portfolio tactically when unexpected situations arose?
What should I have been thinking?
Once I thought about the funding requirement in more detail, in December 2015, a couple of things became clear.
Continue reading “Borrowing £2m to buy equities… two years later” →
FIRE v London 