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What is the Most Efficient Method of Borrowing?

16K views 101 replies 18 participants last post by  mordko 
#1 ·
I don't have any debt but am considering opening a line of credit, maybe for 150K. The idea is that I would use it to fund minor investment projects which have a high probability of return, like installing solar panels.

Right now we are looking at a line of credit from the Investment Group. Unlike mortgage, there is complete flexibility in terms of repayments which is nice but the rate is a bit higher than with closed mortgages (2.95%). I don't have the T&Cs yet but the agent mentioned something about "all in one".

Is anyone familiar with the product? What are the problems with it?

Suggestions, comments welcome - thank you.
 
#71 ·
Hi:

I don't see the government as a benevolent force, so I run this stuff conservatively.

I know which securities I held the last time I had zero margin, and thus can prove that there is no loan against. So if I need spending cash, I journal these sorts of shares to my cash account before selling. Selling in the margin account could be interpreted as paying down the loan and then borrowing for personal consumption.

Ditto for dividends. If recieved in the margin account, could be interpreted as paying down the loan. So as long as I have good margin, I journal over some shares such that the dividends land in the cash account. Now I have "clean" money coming in that I can spend on personal consumption, or explicitly pay down margin.

I really do not see the desire to tempt CRA here. Sure other's interpretations may be correct and mine may be incorrect, but it costs but a bit of tme to arrange things as above. A vaccine against​ future possible CRA troubles.

Hboy54
 
#82 ·
IB's margin rates are cheaper than TDDI but I still choose to use TDDI's.

It's because IB also implements a brutal margin call system. It's fully automated and they are well known for this in trading circles ... once you are in a margin violation, in real time, the system starts taking action and liquidating your shares.

I know this first hand -- because IB once decided that one of my marginable securities was no longer marginable. I only had 1 business day to respond to the situation. You can't even transfer in money with 1 day notice! Again... IB is notoriously brutal on margin enforcement. You don't just have to worry about stocks dropping in price, but also have to worry about them changing their policies of what's marginable and for how much. All brokers can change this.

I don't want to tempt fate with IB's highly accurate and literal, real time system. TDDI operates more like a traditional brokerage. The margin situation is evaluated overnight. Their policies on what is marginable is probably more stable and less likely to dramatically change.

They will also probably give you some leeway even if you are in margin violation. Considering all this, I'd rather take the 4.0% at TDDI than the 2.0% at IB. After all, TDDI is a more mature brokerage.
 
#84 ·
Eclectic, thanks a lot for your comments. I have neither CC debt (I used it as short for everyday expenses), God forbid, nor do I shuffle pay check money every month. I am trying to pick up your brains by describing a clean scenario. I will try to go through the material linked. I gather that even withdrawing dividends from a margin account “taints” the whole margin. Now I understand why HB54 appears to (temporarily?) journal dividend paying investments from the margin account to the cash account. One more question, if you do not mind. In your opinion, does one have to track which equities were bought on margin? Does it matter for tainting? For example you bought BMO with cash, RY on margin. Both pay dividends today RY $500, BMO $450; you withdraw $450. Have you tainted RY margin? Have you tainted other positions bought on margin? As the guy in the commercial says, does it blend?
 
#85 ·
... does one have to track which equities were bought on margin? Does it matter for tainting? For example you bought BMO with cash, RY on margin. Both pay dividends today RY $500, BMO $450; you withdraw $450. Have you tainted RY margin? Have you tainted other positions bought on margin?


my understanding is that a margin position applies to an entire account & to every security it holds or is short.

does not matter which security may have been purchased using margin or which security may have been paid for with cash on hand at time of purchase. Once the margin is impaired, every security in the account is affected.

that's my understanding. It's what permits one smallish privately-owned broker, which offers nothing except margin accounts, to borrow from any & every account that has even a small margin impairment.

.
 
#86 ·
Comingling deductible and non-deductible amounts is a bad idea. CRA's view is that the deductible amounts are paid off first. Much like a cash advance on a CC.

For example, you have 100K loan which is fully deductible. You borrow another 20K to buy a car. Then you sell stock worth 20K to buy the loan back down to 100K.
You do not have a fully deductible 100K loan anymore. Only 80K of it is deductible. You would have to pay the full loan off, then reborrow and invest it all over.
The sequence of events, as well as the purpose of the borrowed funds is paramount to maintain tax deductibility.
Just because one might have been able to deduct full interest expenses in the past doesn't mean it was a legitimate deduction.
And unlike speeding (I've never got a ticket before), CRA can go back at all your previous returns and request proof of eligibility (whereas the cops can't go back in to your car computer and ding you for speeding that occured in previous years - at least not yet....)
 
#89 · (Edited)
Comingling deductible and non-deductible amounts is a bad idea. CRA's view is that the deductible amounts are paid off first. Much like a cash advance on a CC ...
I thought I had read something like this ... but wasn't finding the references.

As well, keeping the loan 100% deductible also means the loan provider is doing all the bookkeeping instead of having to make adjustments, with supporting documentation.


Cheers
 
#92 ·
Thanks Eclectic. Regarding CC debt, my head was probably spinning from reading in the RC link about use, direct use, and indirect use and wanted to clarify what I meant by CC debt.
The assumption about withdrawal of dividends for personal consumption tainting the whole margin - this is how I interpret reasons for tainting-avoidance strategy described in #71. (Also recent comments in #86.) Mine original (in retrospect not well-informed) interpretation was thus closer to your well-informed explanations. As I am big on keeping records, and backups, and backups of backups (professional idiosyncrasy) it will be easy to verify if I ever sinned. Thanks again.
 
#93 ·
... The assumption about withdrawal of dividends for personal consumption tainting the whole margin - this is how I interpret reasons for tainting-avoidance strategy described in #71.
The fear I read in post # 71 is not dividends but dividends paid to the margin account will be seen a paying down the loan. Essentially instead of withdrawing dividend income which is okay, the withdrawn $$$ could be seen as an increase to the loan.

I didn't want to deal with margin calls or finer points like this so I kept it simple by using a HELoC that is only used for the investment portfolio (I have other sources for other borrowing needs). Documentation is easy, where what is intended to pay off loan is clear. Plus there's no need to have separate calculations.

The work then boils down to making sure all RoC paid has been paid off and that the investments that make up the portfolio have not changed their policy, affecting their eligibility.


Cheers
 
#98 ·
OK, so had my meeting with an IG advisor. It was good:

- A young guy; he first started with his sales pitch and how they really care about the investors and how his dad used their mutual funds and liked them so much that he himself chose to work for IG.

- Very responsive; provided the information I was looking for in advance of the meeting. Actually prior to this guy I had contacted someone else from IG who wasn't responsive so that agent got "fired".

- Explained that I wasn't really interested in anything except for the line of credit.

- He asked for my assets/liabilities. I gave him the printout of my portfolio with all the time- and money-weighted returns, etc... Explained that I use the Couch Potato/ETF/indexing approach.

- He asked for the total MER (0.09%), said that he has nevery seen anyone having their investments in such order and never pushed any of his investment products. So... I am impressed.

- The product is actually a National Bank "all in one" account. There are no monthly fees. The interest rate is Prime plus 0.25% = 2.95%. No up front fees. The account also allows you to have up to 99 seperate line of credit subaccounts, which could be useful for tracking/taxation.

- This is better than what I got offered by my bank, so I'll probably go with IG - subject to reconfirming that HSBC won't budge on up front charges and their 3.2% interest rate.
 
#101 ·
OK, so had my meeting with an IG advisor. It was good:
...
- He asked for the total MER (0.09%), said that he has nevery seen anyone having their investments in such order and never pushed any of his investment products. So... I am impressed.
...
... glad to hear that it went "good". As for pushing his products, how can he when your MER is .09% - I think he would be embarrassed enough to be able to charge his dad .90% MER. Did he ask you for investment advice (off records of course) or if you were hiring?
 
#100 ·
^ could be an additional lawyer fee for adding the bank to the title but it won't be more than $200; the lawyer will get back to me shortly. IG will cover the appraisal costs; quite frankly it should take them a minute of browsing to confirm that there is lots of equity. No other costs.
 
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