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Should you borrow to invest?

Jan 8, 2018
Couple reviewing financial statements

Every year, you contribute the maximum allowable amount to your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) and meet your non-registered investments goal. You’re on track to achieve your retirement savings objective.

But now let’s say you want a larger nest egg – perhaps to retire earlier or more comfortably. So, you’re wondering about borrowing money to invest more in your non-registered account.

The benefits of borrowing

To come out ahead, you need the after-tax return on your investments to be greater than the after-tax cost of your loan. On the investment side, equities are the typical choice, simply because interest on fixed-income invest­ments is less likely to outpace loan interest by a worthwhile margin.

As for the borrowing cost, that’s where the real attraction lies. Even after recent rate increases, today’s interest rates remain historically low. In addition, provided you’re investing through a non-registered account, any interest you pay may be tax-deductible.

The downside

There are risks, however, that you need to be aware of before implementing this strategy:

  • Your investment could decline in value. When you invest with borrowed funds, losses are magnified when markets fall. Your loss is not only your securities’ decreased value but also the loan interest you pay.
     
  • Interest rates could rise. Any increase tightens the all-important spread between investment returns and borrowing cost.
     
  • Your circumstances could change. Should unforeseen events cause your income level to fall, your investment loan could become a financial burden.

Borrowing to invest can be effective when practiced carefully, but it’s not for everyone. Talk to us to see if this strategy suits your investment objectives and risk profile.

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