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Borrow to invest?

Saving | Savings Accounts Helpful? 2

Asked by megarich, submitted 21 November 2011.

Open Quote I operate a current account and use an overdraft. I have raised capital as much as my borrowing power will allow and am thinking of saving some money to invest in real estate. Should I open a savings account or leave the money in my current account to save me some overdraft interest?End Quote

Answered by Justin on 18 July 2012

Borrowing to invest (known as 'gearing') is a risky game, especially when paying sky high overdraft interest rates.

If you're paying anywhere near the average overdraft rate of 19.5% then forget it - pay off the overdraft. You won't find an investment with the potential to generate these kinds of returns unless you take a significant amount of risk, which could leave you facing losses and maybe having to borrow more money to manage your debts - a dangerous downward spiral.

Even if you could borrow money cheaply I'm not sure I'd use it to invest in the current climate, not unless you can comfortably afford to lose it, as markets are too volatile.

So yes, I'd suggest leaving the money in your current account to avoid paying overdraft interest. And, if you find yourself sitting on some spare cash having paid off borrowings then perhaps open a savings account where you can safely build up some rainy day money to avoid the risk of needing to use an overdraft in future.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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