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Suppose a person wants to buy a property. There are 2 methods of financing that come to mind;

1) Get a mortgage and borrow up to 80% of property value to buy the property. This is so that not too much cash is locked up in the property.

2) Buy property with cash. Then, borrow up to 80% of property value using home equity loan.

In both cases, cash from the loan will be used to invest in the stock market. Assume that the person has a track record in equity investment and is confident of earning more than the interest expense of the property loan. Mortgage interest is usually quite low and should not be too difficult to beat.

What are the pros and cons of each financing method or are they about the same?

Is the 2nd method less risky given that the property is fully paid up?

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    In theory they are basically the same situation. However, in practice you may find policies, rates, and "qualifications" may differ (even within the same institution) as they may process these loans differently. Also, you may not necessarily qualify to borrow 80% of your property value as cash or a credit line after the purchase; and you probably wouldn't find out whether or not you did qualify until after the purchase. At least that's my guess. – Keith Feb 22 '18 at 5:55
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    In the US, wouldn't a huge difference be in the effect on your credit rating? (Plan (2) being far better for your credit rating, no ?) – Fattie Feb 22 '18 at 16:07
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They are both equally bad. You are financing a risky (subject to gains and losses) investment with a risk-free (the loss in this case is constant) loan.

Is the 2nd method less risky given that the property is fully paid up?

No - even with a home equity loan you still pledge the house as collateral, so if you default on the loan the bank can foreclose on the home. You might not even be able to get a line of credit that large - the bank may prefer a traditional mortgage.

Mortgage interest is usually quite low and should not be too difficult to beat.

On average, yes. The problem is you're worried about "too much cash being locked up in the property" but not worried about cash being tied up in investments. Yes stocks and other investments are much more liquid, but suppose your investments drop 10% in a year (which is not unheard of). Now your total loss is 10% plus the paymenmts you have to withdraw to pay your mortgage.

Leverage (which is essentially what you're working with - borrowing money to multiply the amount invested) multiplies returns but it also multiplies losses. If you have a few bad years, you can end up losing your investment and your house if you can't make the mortgage payments.

A safer plan would be top pay off your house with cash and put whatever monthly payment you would have made on the loan into investments, preferably tax-advantaged investments like retirement accounts. You don't have to worry about making a fixed monthly mortgage payment, you build up your investment portfolio over time, and you have cash flow to get you through emergencies.

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These are from from equal approaches. But in some ways they are equal.

2) Buy property with cash. Then, borrow up to 80% of property value using home equity loan.
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Is the 2nd method less risky given that the property is fully paid up?

In both methods the property is at risk. The 2nd option still has a a Home equity MORTGAGE, which means the risk is the same either way.

If you were counting on the pile of cash to make your monthly payments; or you were counting on the dividends, capital gains, and selling stock that increased in value in order to make the payments; then if you can't make those payments then the house is at risk.

You may find that the home equity loan has a higher rate and a faster payoff period. That combination would make the monthly payments higher. You may also find that the bank will allow the total value of the loans to be 80% but might limit how much can be maximum value of the home equity loan can be.

Depending on your country, a first mortgage and a second mortgage may be treated differently when it comes to deductibility of the interest. That could make a large difference in taxes.

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