# Newbie Alert: Should I borrow to Invest?



## newbie97 (May 31, 2011)

Hey guys i'm a newbie so please bare with me. I understand nothing about finance and need some direction.

My current situation:
- Wife and I work full time
- I invest in a RRSP with my personal Bank and also in a group RRSP through my work on a monthly basis..automated through my pay
- work pension is auto-deducted through my pay
- I am apart of an ESP plan through work also automated through my pay
- I have a mortgage which is coming up for renewal (5 years)
- Student loan payments as well for both of us
- car payments

I pay about $700/month in studnet loans which are scheduled to be paid off in 2020 I believe. I'm looking for a quick way to help pay it off before then. I believe the current interest rate on this loan is 6-7%.

My question is:

- since my mortgage is coming up for renewal should I work my student loan into my mortgage or

- should i borrow money against the equity in my home and invest in a TFSA to help pay back the loan faster

does anyone know of any amazing financial advisors in the Greater Toronto Area that I can consult with?


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## larry81 (Nov 22, 2010)

pay your 'bad' debt first


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## Soils4Peace (Mar 14, 2010)

Pay off the higher interest 'bad' debt first. 

Invest in the employer RSP and ESP if they match. Otherwise you may be better off with a TFSA:

http://www.canadiancapitalist.com/c-d-howes-take-on-tfsa-versus-rrsp/


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## Jungle (Feb 17, 2010)

Do not borrow to invest in your TFSA, the interest is not tax deductible. You would just be speculating anyway. Pay off your bad debt first, try to make extra payments (osap and car loans).

I do not refer financial advisors on here (i only really know one anyway) but the advice you are receiving here is just as good right now. Look at getting term life insurance and your wills done. Once your bad debt is paid, then I would consider seeing a FA. (although I do not like the underperforming mutual funds most all of them sell)


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## Oldroe (Sep 18, 2009)

Theirs only 1 great FP in the world "newbie97" and never forget that.

No plan for student loans bad.

No plan for exacter money on mortgage bad.

No details for car payments bad.

No plan bad.

Don't ever borrow to invest until you have a plan.


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## the-royal-mail (Dec 11, 2009)

Borrowing to invest is a bad idea, esp for someone who claims to be a newbie.

Have you looked at investment returns? They're not that great and are not a certainty. However, the costs of borrowing ARE a certainty.

Forget about clever shell games. Pay off the debts ASAP, starting with the smallest and highest interest ones first and work your way backwards.

It almost sounds like you're looking for a quick solution to a long term problem. That mentality is dangerous.

You need to come up with a debt repayment plan, not an investment plan. You should be able to accomplish this in a simple excel sheet if you know your income.

One day at a time.


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## barnett.betty (May 31, 2011)

Maybe it is fine to borrow for investing purposes. Make a capital out of the borrowed money and start your own business. That usually happens.


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## marina628 (Dec 14, 2010)

Also don't put student loans in with the mortgage .Sounds like you need to focus on the debt you already have before taking on new debt.If you wanted to buy a couple lawn mowers and a trailer to cut grass on weekends to earn extra money I say go for it but to borrow to put in the stock market I do not think that is a good idea .


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## Cal (Jun 17, 2009)

larry81 said:


> pay your 'bad' debt first


+1


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## kcowan (Jul 1, 2010)

Why do you have car payments? Buy cars you can afford to own outright. This will eable you to accelerate your student loan repayment. Ratchet back on retirement plan investments to the maximum that your employer matches. Stay out of RRSPs/TFSAs until you have free cash flow to invest.

Come back here when you have achieved free cash flow for investment advice.


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## Rico (Jan 27, 2011)

marina628 said:


> Also don't put student loans in with the mortgage .


Especially if your student loan interest is tax deductible - if you pay it off by consolidating it with your mortgage, you'll lose that deduction.


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## KaeJS (Sep 28, 2010)

You cannot borrow to invest until you have:

Paid off all debt
Have some type of "back up" account in case you make a mistake, or four.


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## Larry6417 (Jan 27, 2010)

I agree with the advice so far. Borrowing to invest isn't a bad thing *if *you have no other debt, the amount borrowed can be easily carried, and your risk tolerance is high. I've used my HELOC to invest, but I have no debt besides my investment loan. Also, the amount borrowed is small compared to my cash flow. I think you should pay your other debts before taking on new ones.


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## MoreMiles (Apr 20, 2011)

newbie97 said:


> I pay about $700/month in studnet loans which are scheduled to be paid off in 2020 I believe. I'm looking for a quick way to help pay it off before then. I believe the current interest rate on this loan is 6-7%.


2020, almost 10 more years? If you tell people that you have an investment offering 6-7% per year until 2020, most people will put the money in it. So why are you looking elsewhere?

Your best investment is to pay off that 7% loan, at that interest rate, your cost of borrowing is 100% of your capital!!! If you are not sure how to calculate compound interest, use the rule of 72... 72/7=10... so it takes about 10 years to double an amount with 7% So you are saying that your loan is amortized until 2010. It turns out that about half of it (ie, around $300) goes to the interests, not even the capital.

You will not find any other low risk investment beating your loan.


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## slacker (Mar 8, 2010)

It's your lucky day !!

You have an investment in your disposal that has a GUARANTEED after tax return of 6-7 %. That's the equivalent of a 9-10% GIC !!!

That is a ridiculously good investment. You will not find a better investment in the market on a risk adjusted basis.

Pay off your debt.

EDIT: It's a hazardous to derive conventional wisdom from outliers like Warren Buffett, but here it is anyway:

“Leverage is the only way a smart guy can go broke." - Warren Buffett


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## newbie97 (May 31, 2011)

okay guys so i guess the question now is ...should i work my student loan into my mortgage or not?

my students loans is $700/month
my current mortgage is $1400/month at 5.25 fixed with five years elapsed out of 25 years

my mortgage is coming for renewal...mortgage broker has told me if I work the student loan into my mortgage it will be around $1600 for a 13 year ammortization

1400+700 = 2100/month as apposed to $1600...a savings of $500 a month which i plan to throw into my mortgage at the end of the year ($6000)

does this sound reasonable? the only thing is i wont be getting the tax breaks on my tax return for the interest paid on my student loans..

thoughts please!


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## the-royal-mail (Dec 11, 2009)

As we have already said, do not fold in your loan with the mortgage. You're not comparing apples to oranges when you compare your current mortgage costs to the post-renewal costs. You've paid back some principle on the mortgage, so it's lower. I see absolutely no reason to lump these two in together. 

Just because you _can_ do something, doesn't mean that you should.


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## Four Pillars (Apr 5, 2009)

newbie97 said:


> okay guys so i guess the question now is ...should i work my student loan into my mortgage or not?
> 
> my students loans is $700/month
> my current mortgage is $1400/month at 5.25 fixed with five years elapsed out of 25 years
> ...


I don't think you are analyzing this properly. The reasons for consolidating loans are to lower the effective interest rate of all your loans and in some cases to lower the monthly payments (if you are short of cash). It doesn't sound like you have a cash flow problem.

The question you should be asking is - how much interest am I saving on my student loans if I convert them into the mortgage?

You mention the interest rate on the student loans is 6-7%...let's call it 6.5% (but find out the exact amount).

How exactly does the student loan interest write off work? Does the interest paid lower your net income by the amount of the interest or is there some other mechanism? (I'd be interested in learning this).

Calculate the net after tax interest of the student loans and compare to the interest rate on the mortgage. Keep in mind that the mortgage interest rate will not remain steady forever. 

Is the student loan interest rate fixed or can it go up and down?

If the student loan interest rate is fixed and the net interest rate on those loans is not appreciably higher than the new mortgage rate - it's probably not worth consolidating.


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## andrewf (Mar 1, 2010)

I don't get it. People seem to have a 'house' bias. It's okay to leverage 80% or more to buy a house, but any leverage at all to invest in other assets is terribly risky.

That said, I agree with the high after-tax ROR on repaying student debt. That's why I paid mine off before buying a house.


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## MoneyGal (Apr 24, 2009)

I agree that you need to actually work this out mathematically. 

Student loan interest gives rise to a tax credit (at 15%), not a tax deduction. $1000 of interest paid in a given year will give rise to a tax credit of $150.

This actually means the breakeven point (from an after-tax rates POV) is fairly easy to achieve. 

There are other considerations with a student loan, mainly the capacity to defer repayment IF you re-enter a qualifying educational program. If you are certain you are not going to do that, and you will save (more than 15% of the total interest paid under the current scenario) by consolidating, it is worth considering. That student loan interest rate is high - much higher than mortgage rates - it is not worth keeping the student loan intact IF the only reason to do so is to retain the tax credit for the interest paid. 

However, all the other advice in this thread is on-point as well. You need a debt repayment plan which goes beyond moving the shells around - mostly I think you need a clear way to think through this.


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## MoreMiles (Apr 20, 2011)

There is also the issue of converting unsecured loan to secured one.

Why put your house at stake when you don't have to? You may save on interest rate from credit card. But at what cost? Being homeless?

If you don't pay a credit card, they have to sue you to get the money... so what? It's not secured with collateral. If you don't pay a mortgage, they foreclose your home and make you homeless.

If your ability to pay debt is borderline, you should take this into account as well. Do not give up your collateral that easily.


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## edongzki (Mar 16, 2011)

I think borrowing to invest is generally a bad idea.


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## newbie97 (May 31, 2011)

thanks for all the replies...can anyone refer me to someone in toronto who can sit down and do all the calculations with me....i don't have a clear understanding of everything that's all involved


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