Ever found yourself scrolling through real estate listings? How you wish you had enough money to buy that condo unit in BGC? Or you’ve been eyeing those condo units in pre-selling rates that everyone in your Facebook investment group keeps talking about. If you’re nodding your head right now, you might have wondered if borrowing money to invest is a moneysmart approach.
Here’s the reality: We Filipinos are getting more financially savvy. According to Statista, consumer loans hit ₱1.4 trillion in 2023, showing that more of us are willing to take on debt to pursue our financial goals.
But is getting an investment loan to fast-track your wealth-building journey really a smart move? Is it a brilliant strategy or a disaster waiting to happen? Let’s explore this concept before you say yes to the loan officer from the bank who called you, maybe a few times already.
What exactly is an investment loan?
An investment loan is the money you borrow specifically to purchase investments. Whether it’s buying a property, stocks, managed funds, or other assets, you’re essentially using someone else’s money (usually a bank’s) to grow your own wealth faster than you could with just your savings.
Here’s how it typically works: you take out a loan, pay interest on that borrowed amount, and hope that your investment returns exceed the cost of borrowing. When it works out, the math makes sense – your investment increases more than you pay in interest, and you pocket the difference.
Seasoned investors and financial experts often refer to this as leverage, but some, like Warren Buffett and Charlie Munger, are always cautious when taking this kind of loan. Warren Buffett once said, “If you’re smart, you don’t need leverage; if you’re dumb, it will ruin you.”
Types of investment loans available to Filipinos
Not all investment loans are created equal. Here are the most common types you’ll encounter in the Philippines:
- Investment property loans. These are specifically for buying real estate that you plan to rent out or sell later for profit. BPI and BDO offer competitive rates for condo purchases in Metro Manila.
- Margin loans. These allow you to borrow against the value of securities you already own in your margin account. COL Financial and First Metro Securities offer this to experienced investors.
- Personal loans. The most flexible option is that you can use to purchase securities, managed funds, or other investments. Digital banks like CIMB and Tonik offer competitive rates.
- Peer-to-peer lending. Platforms connecting borrowers and lenders directly, though always verify if they’re SEC-registered to avoid scams.
The potential upside: Why some Filipinos choose this path
The main appeal of borrowing to invest is simple: the potential to make more money through leverage. When your investments perform well, the returns can significantly outpace the interest paid on your loan.
For example, if you borrow ₱500,000 at 7% interest to invest in a property that appreciates by 12% annually, you’re ahead by 5% (minus fees and taxes). That’s ₱25,000 in profit you wouldn’t have made without the loan.
Other benefits include:
- Access to compound returns sooner rather than later
- The ability to diversify your investments with a larger initial sum
- Potential tax deductions on interest paid (depending on the investment type)
Real talk: For some investors, particularly those looking to build passive investment income or cash flow from rental properties, borrowing can accelerate their timeline to financial independence.
The risks involved: Why you need to think twice
Before you rush to apply for that loan, remember that investing involves risk. In fact, borrowing to invest significantly increases that risk.
Here’s why:
You could lose your initial investment AND still owe money. If your investment tanks, you still need to repay the loan plus interest.
- Margin call. If you use margin loans and your investments drop in value, your lender might require you to deposit more money immediately.
- Interest rate fluctuations. If rates rise, your loan could become more expensive, eating into your potential gains.
- Cash flow pressure. Those monthly interest payments don’t stop, even when your investments aren’t performing.
I’ve personally seen friends struggle when their supposedly “sure thing” investment property sat vacant for months while they scrambled to make loan payments with their regular income.
What’s more, I recently saw some posts on Facebook where property buyers now sell the pre-selling units even before they have the turnover. Here’s a screenshot. I redacted the name of the property developer.
Image credit: Facebook Group
Image credit: Facebook Group
Bangko Sentral ng Pilipinas (BSP) data shows that the real estate sector is experiencing increasing loan defaults. As of September 2024, residential real estate loans comprised the majority (65.2%) of nonperforming real estate loans. This means many property investors are struggling to meet their loan obligations.
Now, my question to you is this: How much excess funds do you have that will allow you to keep your property and not worry about your monthly amortization?
Remember, if you don’t have tenants in your condos or apartments for months, you still need to pay the bank on your property loan.
Which brings me to the next section.
Who should consider investment loans?
Investment loans make the most sense for:
- Experienced investors with higher risk tolerance
- People with stable income and minimal existing debt
- Those who fully understand the investment vehicle they’re targeting
- Investors with a solid emergency fund (ideally covering 6-12 months of expenses)
If you’re a newbie investor who just heard about investment opportunities from your tito during a family reunion, borrowing money to invest probably isn’t for you yet.
Chinkee Tan, known as the “Pambansang Wealth Coach ng Pilipinas,” expressed his views on his TikTok account regarding this. “Never borrow to invest! Huwag mag-risk sa pamamagitan ng utang—mas maganda ang…”. This translates to “Never borrow to invest! Don’t risk through debt—it’s better…”
@chinkeetan Never borrow to invest! 💸 Huwag mag-risk sa pamamagitan ng utang—mas maganda ang mag-invest gamit ang sariling pera. #SmartInvesting #AvoidDebt #financialwisdom ♬ original sound – Chinkee Tan
5 Moneysmart tips before taking the plunge
If you’re still considering an investment loan, here’s how to approach it wisely:
- Do the math meticulously. Calculate all costs, including interest, fees, taxes, and potential losses, to see if the investment truly makes sense. Did you know you’ll pay monthly association fees, annual taxes, etc., as a property owner?
- Check your financial position. Ensure your debt-to-income ratio stays healthy even with the new loan.
- Read the loan agreement thoroughly. Understand all terms, especially around variable interest rates and prepayment penalties.
- Start small. Don’t bet your entire financial future on one leveraged investment.
- Consult a financial adviser. A qualified professional can provide investment advice fit for your unique financial situation.
People also ask about investment loans and their use
I’m sure you have burning questions in mind. Here are some of the common ones that might help you decide whether to go all in or not with investment loans.
1. Can OFWs apply for investment loans in the Philippines?
Yes, many banks offer investment property loans and personal loans to OFWs, often with special programs recognizing their foreign income. Documents typically required include your employment contract, remittance history, and sometimes a local co-borrower. Digital banks like CIMB have made the process even more accessible for overseas workers.
2. How do investment loans differ from regular personal loans?
While you can technically use personal loans for investments, dedicated investment loans often offer better terms, lower interest rates, and may have tax advantages. Investment property loans and margin loans are secured by the asset you’re purchasing, which typically means better rates than unsecured personal loans.
3. What happens if I can’t repay my investment loan?
If you default on an investment loan, the consequences depend on the loan type. For margin loans, your broker will liquidate your securities.
For property loans, the lender could foreclose on your property. For personal loans used for investments, your credit score will suffer, and the lender may pursue legal action to recover the debt. This is why having emergency funds is crucial before borrowing to invest.
Final thoughts
While borrowing to invest can potentially accelerate your wealth-building journey, it’s not for everyone. As with any financial strategy involving debt, proceed with caution. Do your homework. Be honest about your risk tolerance.
Remember: the wealthiest people I know didn’t get there by taking shortcuts, but by making informed decisions that align with their long-term financial goals.
Whether you use borrowed funds or invest your savings, what matters most is that you’re taking steps toward securing your financial future.
Are you ready to level up your investment game? Make sure you do your homework before signing the loan documents.