As a toy example, if a bank will lend you money at a 2% interest rate, and the stock market will probably net you at least a 5% interest rate, you can borrow as much as the bank will allow, put in the stock market, and pocket the difference. … In other words, the bank has to see you as a safe bet, for you to be able to borrow and profit.
If you are able to do this, the bank would put their money in the stock market themselves, and only lend out money at a rate higher than they could get from the stock market. The very fact that it works would prevent you from being able to do it.
You could only profit from borrowing if you actually have an advantage over the bank beyond just “I am rich”.
You have a greater appetite for risk than the bank does. Depending on the jurisdiction, regulators force banks to put their assets into relatively safe loans (insured mortgages, Treasuries, high-grade bonds, etc.) rather than relatively risky equity. We do not want the banking system to collapse if the stock market goes down 15%!
And one reason an individual can have a greater appetite for risk than the bank does, is that the bank is risking other people’s money. If you lose 15% of your savings, that sucks, but it only sucks for you. If the bank loses 15% of everyone’s savings, that is a big problem.
(Yes, there’s deposit insurance … which goes along with regulations on risk.)
I think it is usually the case that banks have legal restrictions on what they can invest depositor funds in, though? This varies by country, and can change over time based on what laws the current government feels like enacting or repealing, but separation between the banking/loan-making and investing arms of financial institutions is standard in lots of places.
I have personally taken out a mortgage at ~1.6%, invested the money in a standard index fund, and made money, paying back the mortgage rather than renewing when the interest rate on offer was 6%. I imagine the same would be true of an investment loan, and know for a fact that investment loans are available, and the income tax code in my country makes their interest tax- deductible.
If you are able to do this, the bank would put their money in the stock market themselves, and only lend out money at a rate higher than they could get from the stock market. The very fact that it works would prevent you from being able to do it.
You could only profit from borrowing if you actually have an advantage over the bank beyond just “I am rich”.
You have a greater appetite for risk than the bank does. Depending on the jurisdiction, regulators force banks to put their assets into relatively safe loans (insured mortgages, Treasuries, high-grade bonds, etc.) rather than relatively risky equity. We do not want the banking system to collapse if the stock market goes down 15%!
And one reason an individual can have a greater appetite for risk than the bank does, is that the bank is risking other people’s money. If you lose 15% of your savings, that sucks, but it only sucks for you. If the bank loses 15% of everyone’s savings, that is a big problem.
(Yes, there’s deposit insurance … which goes along with regulations on risk.)
I think it is usually the case that banks have legal restrictions on what they can invest depositor funds in, though? This varies by country, and can change over time based on what laws the current government feels like enacting or repealing, but separation between the banking/loan-making and investing arms of financial institutions is standard in lots of places.
I have personally taken out a mortgage at ~1.6%, invested the money in a standard index fund, and made money, paying back the mortgage rather than renewing when the interest rate on offer was 6%. I imagine the same would be true of an investment loan, and know for a fact that investment loans are available, and the income tax code in my country makes their interest tax- deductible.