By Godfrey Kenneth Gobba
Most people acquire property either by saving up enough money to buy it or by using banks money to buy it. Those that choose to borrow money from the bank know that coming up with collateral is definitely not easy.
But what if there was a way you could build up collateral that the bank will find so attractive; they will probably drool over it!
Collateral Investing 101
For many of us that do not have physical assets to use as collateral for bank loans, borrowing against the balance in our savings account is sometimes our only alternative.
What many of us do is to religiously send money to a special savings account in the hope that we will one day have enough to qualify for the kind of loan we need to acquire property.
This of course is an uphill task because the monthly fees and miserable interest don’t help very much in accelerating the growth of our nest egg.
This is where collateral investing comes to our rescue. Collateral investing simply involves the acquisition of an asset that can later be used as collateral to qualify for a bank loan in the future.
We unknowingly do it with our land, our homes and cars that we so often pledge as security to the banks.
But what most people don’t know is that it can also be done with Government bonds. You can build up a bond portfolio that can then be pledged as collateral for a bank loan.
Your bank will drool over this kind of collateral because bonds are very safe; they pay guaranteed semi-annual interest and they are very marketable.
You probably think that I am pulling your leg but why don’t you just walk into your bank today and inquire if they would be willing to take a portfolio of government bonds as collateral?
The banks themselves do it with each other. They lend money to each other and use the securities they hold as collateral. Their customers however don’t do it because they don’t know it can be done.
You could even make a safe bet that over 85% of the people that have bank accounts don’t know what a government bond is.
Ok, How Do I Do It?
As you accumulate your savings nest egg, instead of using a savings account, why not use that money to buy high yielding government bonds every other month?
This strategy is not about acquiring bonds as an investment per se but as a means of building up a bond portfolio that you can then pledge as collateral for a bank loan.
Government Bonds in Uganda pay interest that is usually above 12% per annum and will sometimes even be as high as 17% depending on how crazy the economy is.
In Uganda, government bonds are issued by the Bank of Uganda on behalf of the government to support its spending.
So as you keep on acquiring more bonds, those guaranteed future interest payments will keep on piling up.
This will make your collateral very attractive to the bank because those future interest payments are guaranteed and the bonds themselves are safe and easily marketable in case the borrower defaults on the loan.
As you keep building your bond portfolio, you should keep checking in with your bank who will be able to assess the market value of your portfolio until you have sufficient collateral to qualify for the bank loan that you need to acquire your cash flow property.
Because government bonds pay much higher rates of interest, you will be able to hit your target much faster than with a savings account.
The Beginning
One famous guy once said that, “The only thing standing between you and your goal is the bullshit story you keep telling yourself as to why you can’t achieve it.”
So I will follow suit and say that, “The only thing standing between you and your bank loan, is that bullshit story that is stopping you from either picking up the phone or going to your bank today to ask them if they would accept government bonds as collateral for a bank loan.”
Herd mentality kills. Dare to be different.
Till next time.
The author is CEO, African Investor Academy
Email: godfrey@theinvestmentguru.co.ug
Brilliant idea