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If I owned a hypothetical asset that was deemed extremely safe, and permanently increased in value over time (allowing me to borrow a similar percentage of the asset's value each time the loan reached maturity to pay for the principle + a brand new loan for the same principle amount), would this enable me to endlessly collateralize this asset for a low-interest loan? Of course, I would need some cash-generating source (job, rental income, dividend stocks, etc...) to cover the interest payments, but assuming this was in place and assuming the price continued to rise over the loan life(s), could I not endlessly roll the loans to endlessly get access to cash without ever needing to sell the asset? If I owned enough rental properties or dividend stocks to cover the interest payments, it seems this set up would enable me to always have cash for life's expenses, without actually needing to do any work.

Of course its a HUGE assumption that the asset continues to rise in price over time (and at a magnitude needed for this plan)... but let's just say it does.

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  • Sure, this is how retirement plans work, though not using a single asset. Buy enough assets over your lifetime then live of the wealth those assets generate while you're retired. You don't really use borrowing though, you live off spending part of the assets or the income those assets generate.
    – Robert Longson
    Commented Apr 15, 2021 at 14:18
  • @RobertLongson The question is not about income-generating assets, it is about using assets to secure loans, which is definitely not what retirement plans are.
    – Ben Miller
    Commented Apr 15, 2021 at 14:19
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    @BenMiller-RememberMonica There is something marketed to retired folks that is more similar in structure though: Equity release where you sell your house but continue to live in it. You spend the money and the loan company gets the house when you die, or if the house is worth more than the loan your estate gets the balance. The main point is that people with assets that are rising in value don't have to take out loans to live on, they sell part of those assets instead.
    – Robert Longson
    Commented Apr 15, 2021 at 14:28
  • Naturally, reverse mortgages only give you a portion of the home's value, so the lender makes the difference as profit.
    – RiverNet
    Commented Apr 17, 2021 at 2:23

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Sure. And if you're dealing with large enough sums, you can probably capitalize the interest too.

Say that you've just inherited a bunch of properties worth $100 M. A bank would quite happily give you a loan of, say, $50 M against the properties that has no monthly payments just a balloon payment at the end of the year. At the end of the year, assuming the properties have appreciated, the bank will very happily roll the initial principal plus the accumulated interest plus some additional spending money into a new loan on the same terms. Assuming that the properties continue to appreciate faster than the interest rate and whatever additional spending money you withdraw, the bank will be quite happy to continue this process forever.

Of course, in reality, every asset has ups and downs so you'd need to make sure that the fraction of the collateral that you're borrowing decreases when the asset price soars so that you have room to weather the inevitable drops.

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  • The example makes sense to me; just curious, though, what is a 'balloon payment'? Also, you used a 'year' as the loan maturity timeline. Could have just been for example, but could this same setup have longer maturity dates? Say, 5 years?
    – Runeaway3
    Commented Apr 15, 2021 at 14:39
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    @Runeaway3 - A balloon payment is a large payment that is due at the end of a loan. Historically, it has been common for things like mortgages to be shorter term loans with large payments on the back end that force people to refinance (i.e. the loan would be for 5 years but the monthly payments would be amortized over 30 years and the homeowner would be expected to refinance the balloon payment at the end with a new mortgage). There is nothing special about the choice of a year in the example other than practicality. It's much easier for a bank to defer interest for a year than for 5 years
    – Justin Cave
    Commented Apr 15, 2021 at 14:43

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