# Borrowing to invest, via LoC: My strategy



## lizardninja (Mar 8, 2014)

Hi there,

I'm a big fan of this forum, though this is my first post...

I'd like to take out a line of credit loan to borrow money to invest in relatively stable Canadian dividend stocks. My question is how would I go about to get a low line of credit? Any recommendations for a particular big bank? I'm thinking of borrowing just $5k to $10k.

*Background:*
I only have banks accounts with ING and PC and use Questrade as my discount broker (TFSA and RRSP). I don't have an account with a bricks and mortar bank. (Note: ING and Scotia still act as separate entities eventhough the former is now owned by the latter) 

I have about $25K in my Questrade TFSA in ETFs so was thinking of transferring this to a Bricks and Mortar bank's discount brokerage and use it as a collateral to get an even lower rate.

Then I'd open up a non-registered discount brokerage account and invest in relatively safe Canadian dividend paying equities.

In the short run I imagine my interest payments would be more than the dividends received. But hopefully over the long-er run, with increasing dividend payments, the tax deductability of investing interest, and capital gains, I think I would come out ahead.

I'm hoping this cautious strategy will accelerate my long-term wealth accumulation with moderate risk. (I'm currently 30, no debt, no mortgage, and have no immediate need for this money).

Anyways do you guys have any thoughts on this strategy? Or know if there's a bank which can give me a lower LoC rate for transferring my TFSA to its discount brokerage?

Thanks in advance!


PS. I'm not a fan of borrowing through margin due to the higher rates and margin calls. Also I like being able to keep the LoC separate.


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## lonewolf (Jun 12, 2012)

Hi, Lizadninja

The forum is gonna love ya rational exuberance rocks. The bears are the Krazzzzy ones on here who posts are a joke.


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## favelle75 (Feb 6, 2013)

Well the strategy actually has a name. Its called the "Smith Maneuver", look it up.

Most people do it with a HELOC to get the ~3% interest rate. So pick a dividend with a 5% or 6% yield and let the money fly. Its a legitimate investing strategy, with some obvious risks.


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## Islenska (May 4, 2011)

Yes go for it, don't know your age and you are starting with a small base but "you gotta start somewhere"!


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

Seriously? What ever happened to saving for what you want?

Besides, you're giving the bank a guarantee in the form of interest in exchange for you taking on all the risk. I don't see how that is a good deal for you.

Also, do you have a personal emergency fund saved?


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## Just a Guy (Mar 27, 2012)

Just remember, income earned is in pretax dollars...interest paid is in after tax dollars, though you can claim it as an expense.


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## wendi1 (Oct 2, 2013)

I'm with royal on this one. Leverage is for other people's money, not mine.

It's not exactly the Smith Manouvre, which involves mortgaging your house (!) to play the market. The advantage of the Smith Manouvre is that because you are borrowing to invest, the interest is tax deductable. Not that I recommend it - the thought of maybe losing my house during a downturn is stomach-churning.

Why do you need to do this? Perhaps some other adrenaline-producing sport would be more to your liking? Race cars? Parachuting?


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## lizardninja (Mar 8, 2014)

thanks for the replies guys/gals:

To answer a few quick questions: yes I have a personal emergency fund. I'm single, don't have kids or much responsibilities. Stable job. And yes, I would like to essentially engage in the Smith Maneuver with a LoC (I bought the book in fact). I don't own a home so don't have the ability to tap into a low HELOC rate. I've read Talbot Stevens' the Smart Debt Coach, and consider myself fairly aware of the inherent risks in finance (Masters in Economics, CFA candidate).

_I appreciate all the warnings but would anyone know about the specifics: using a funded TFSA in a discount brokerage account at a big bank as collateral to receive a lower interest rate on a LoC? Do banks do this? how to go about it? Any experiences?_

From what I understand, the TFSA is different than an RRSP because a TFSA can be used as collateral for loans. But I'm not sure if that's only in theory, or if banks actually do this. And whether the TFSA must be in a standard TFSA savings account or if it can be as an equity ETF portfolio.

Finally, to hedge against further risk, I am only borrowing a smaller portion compared to my entire portfolio. And I would only really execute this if there's a favourable rates (dividend yields vs interest rate).

Thanks!


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## livingthedream (Apr 28, 2014)

If you are borrowing 5-10k, I don't see it as a big deal. Go for it! As long as you are doing this as a long term investment, can afford the interest payments, and can ride out the ups and downs of the market, I don't see the downside. Just make sure the bank gives you a good rate. If you have more than 20% equity in your home, you can get a line of credit on it and get a good rate.


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## lizardninja (Mar 8, 2014)

thanks for the responses guys/gals:

@favelle75: Yeah. I have the Smith Maneuver book, but unfortunately no home/mortgage. I'm hoping this is the next closest thing, hence my desire to get the lower rate possible.

@Islenska: Thanks, I'm 30 and have no obligations tying me down (Single, no kids). Also Stable Job.

@royal mail: Fair enough. I do have an emergency fund, but am aware of the risks.

@Just a guy: Good point. Yes the tax deductability of investing in NON-REGISTERED ACCOUNTS is a big selling point for this strategy. Also Canadian dividends are taxes slightly lower.

@wendi: this investment interest in a LoC IS tax deductible since it will be invested in a non-registered account. Haha, I'm not an adrenaline junky by any means, but if I cautiously invest and borrow I think I can be better off. (Eg. Driving is a leading cause of accidents but doesn't mean we should stop due to the inherent risks. If we are cautious it can be a vehicle for achieving greater wealth.)

@livingthedream: thanks! 

*Has anyone tried or know about using the TFSA discount brokerage account as collateral for a lower rate LoC?*


Thanks for all the input so far!


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## HaroldCrump (Jun 10, 2009)

Can you list some of these "relatively safe Canadian dividend paying equities"?
I am not being flippant...I have seen all kinds of stocks being listed as safe dividend paying stocks.

Other than the usual suspects i.e. the 5 banks, the 3 telcos, the 3 pipelines, top 3 regulated utilities, what else have you considered?

If that is your list give or take, I doubt you will come out ahead after adjusting for dividend taxes, interest deductibility, and risk.
Average dividend yield of a basket of these stocks is probably in the 3.5% - 4% range.

The best HELOC rate you can find is Prime + 50 bps i.e. 3.50% these days.
IMHO, there isn't enough spread in there to justify the risk.

If you want to buy stocks with your own saved money, surely go ahead (dividend paying or not).
But leveraging against your home to buy dividend paying stocks but barely breaking even does not sound good.


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## lizardninja (Mar 8, 2014)

HaroldCrump said:


> But leveraging against your home to buy dividend paying stocks but barely breaking even does not sound good.


I'm leveraging against my TFSA not my home. And will only execute when it seems worthwhile. 

I just want to know how to set it up through a big banks and/or if the big banks actually do this with their discount brokerage TFSA accounts.


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## lonewolf (Jun 12, 2012)

Do like the big boys borrow Yen then buy Canadian dollars instead of US dollar to invest. (major currency risk so better thrill ride)

The above is something I would never do so I do not know if the small retail investor can borrow Yen that easily near 0 %


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## Eclectic12 (Oct 20, 2010)

wendi1 said:


> ... It's not exactly the Smith Manouvre, which involves mortgaging your house (!) to play the market.


Technically .... the OP is suggesting leveraged investing (i.e. borrow from LoC to invest). As is pointed out, the SM involves a house.

However, AFAICT - SM in it's pure form is not about taking out a mortgage but in converting an existing mortgage which is non-tax deductible to an investment loan that is tax deductible.

The mortgage that is contracted for includes a HELOC, where the idea is that as one pays down the mortgage, the HELOC portion increases as does the investment portfolio and the amount of interest that is tax deductible.

So if one owes $200K on the mortgage, after paying off the mortgage - in theory, one has a HELOC with $200K on it, an investment portfolio theoretically worth $200K, more cash flow as dividends are likely being paid and the interest is 100% tax deductible.




wendi1 said:


> ... Not that I recommend it - the thought of maybe losing my house during a downturn is stomach-churning.


That's where I'm more conservative and only have about 1/3 of the house price on the HELOC, the dividend cash flow to support interest rates doubling and thanks to several stocks bought around Mar 2009 doubling, no mortgage left.

[ Note that I also have an emergency fund in place & have no debts (CC, auto) except the HELOC. ]




wendi1 said:


> ... Why do you need to do this?
> Perhaps some other adrenaline-producing sport would be more to your liking?


Good question ... particularly if one considers that this is currently a low interest rate environment that likely can't last. 

If the dividends/cash payments won't cover the interest - what happens if rates go up? 
What happens if one loses one's job or the investments start cutting the cash flow?




lizardninja1 said:


> ... PS. I'm not a fan of borrowing through margin due to the higher rates and margin calls.
> Also I like being able to keep the LoC separate.


The predictability of the LoC is nice ... but from the posts I've seen, in general, LoC interest > HELOC interest > Margin interest at brokers like IB.


Note that I sleep much easier at night knowing that I've run the numbers for what would happen if I lost my job at the same time as the HeLoc interest rate doubled.


Finally ... a couple of key questions are if/when money might be needed and what sort of risk can one stomach? 
I know of several who were sure in Dec 2008 that "they couldn't take any more paper losses" or that "dividends are just about to cut" and ended up selling for a large loss.


Cheers

*PS*

Another important point for the OP is whether the tax implications to keep the LoC interest 100% tax deductible are well known? Does their bookkeeping system make this easier or harder?

http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm
http://www.taxtips.ca/personaltax/investing/interestexpense.htm

Will they want to keep track of their investments so that appropriate actions are taken if an investment changes what type of payments are being made?

There is potentially benefit but there is also definitely work involved ...


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## jcgd (Oct 30, 2011)

Take a month and think about it and see if you still think it's a good idea. If you do, take another month to think about it and see if you still think it's a good idea. If you do, take another month...

The amount is so small, and the cost is high enough that it'll take a long time to break even. Even when you do you'll be making peanuts after tax. And if you put the money in a registered account to avoid taxes you can't claim the tax write off on interest. 

A better idea would be to sit on the unused LOC and buy in if there is a decent crash in the market. Safer and more likely to pay off long term. 

I'm surprised so many people are supporting the idea right now. It would have been a great idea 4-5 years ago. Now is the time to be raising cash or becoming more conservative and taking less risk, not more.


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## lizardninja (Mar 8, 2014)

jcgd said:


> Take a month and think about it and see if you still think it's a good idea. If you do, take another month to think about it and see if you still think it's a good idea. If you do, take another month...
> 
> The amount is so small, and the cost is high enough that it'll take a long time to break even. Even when you do you'll be making peanuts after tax. And if you put the money in a registered account to avoid taxes you can't claim the tax write off on interest.
> 
> ...


For sure, I won't put the money in a registered account. I'd like to have this set up before any major correction.


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## Grover (Jun 3, 2013)

I dabbled with the idea recently. 
I wondered how having a loaded $50k or $100k LoC (even if it was a HELoC on a seperate property not my current residence) would affect my borrowing in the near future (if i wanted to sell my current residence and buy a bigger one).


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## favelle75 (Feb 6, 2013)

HaroldCrump said:


> Can you list some of these "relatively safe Canadian dividend paying equities"?
> I am not being flippant...I have seen all kinds of stocks being listed as safe dividend paying stocks.
> 
> Other than the usual suspects i.e. the 5 banks, the 3 telcos, the 3 pipelines, top 3 regulated utilities, what else have you considered?
> ...


?? Crescent Point is 7‰. BCE is 5%. Heck, even a dividend-paying ETF like ZDV is 5% when bought on a good day


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## lonewolf (Jun 12, 2012)

Investors intelligence recent reading had the lowest number of bearish advisers since before the crash of 1987. Getting long in the tooth since the market last took a breath.

I do not like the over crowded dividend play. Corporations have borrowed money hand over fist to buy back their own shares. Making it easier to pay dividends when there is less stock outstanding. Whats going to happen if interest rates rise or earnings drop? Right now the corporation are making money on the yield being higher then the interest. In the S&P I herd it was something like a 2% positive spread for the corporation. If the spread goes negative then would the corporations be net sellers instead of buyers ? This could result to a lot of money heading to the exits. The volume of the rally from the 09 low is getting smaller as there becomes less & less greater fools. I just do not see how this can end well when everyone is so bullish from the hedgies having their highest net long if memory correct 170% long to the corporations borrowing money hand over fist. If any wants to join a crowded trade of borrowing money to invest in the market this is your chance with NYSE margin debt being @ an all time high earlier this year which has recently backed off which is a signal the trade is switching from risk on to risk off this is your chance. Where is the money going to come to pay all those dividends ? Were talking stock market here if you want a cow buy a bond or GIC. Want performance of price movement for get the stability of riding a cow ride a bull or bear in the stock arena. NYSE margin debt sky high with low volume to suck up those potential margin calls. Come on guys do you really think this will end well ?


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## HaroldCrump (Jun 10, 2009)

favelle75 said:


> ?? Crescent Point is 7‰. BCE is 5%.


So you will invest your leveraged portfolio into 2 stocks half-each with a blended yield of 6%?



> Heck, even a dividend-paying ETF like ZDV is 5% when bought on a good day


No it is not.
The _distribution_ yield is 4%.
They have already cut their distribution once since inception - from 6.5c. down to 6.2c.

Also, take a look at their list of holdings - it comprises of several high yield, high risk, underperforming stocks like Wajax, Shaw, Rogers, Teck Cominco, etc.
Hardly what anyone could call "relatively safe Canadian dividend paying equities".

They make up for the underperformance by loading up on high yield royalties and ex income trusts.
That is how they are delivering 4% yield.

You and the OP are looking for sweet arbitrage opportunity here - borrow @ 4%, earn dividend yield at 7% risk-free, and pocket the difference.
It does not exist - at least not at the risk level you are thinking of.


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## My Own Advisor (Sep 24, 2012)

What RoyalMail said +1


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## RBull (Jan 20, 2013)

Ditto here with RoyalMail. No brainer. 

There's no easy ride to FI.


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## gibor365 (Apr 1, 2011)

I knew couple of guys who lost their homes playing stock market.... We have house LoC from National bank , Prime only, but I would never consider taking this money and investing .... more than than we have close to 45% of all our money in cash and I prefer to earn save 2.5% on HISA and GIC and play with another 55% on markets


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## SkyFall (Jun 19, 2012)

If you want to go this path you better have a HELOC since interest is lower, I work for one of the big banks and the lowest ULOCs are around 5-6%.... I don't see how you will manage to get better than that... and given the strategy you want to employ with those interest rates, I think the margin of safety is pretty slim and it's not worth the stress it will generate.


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## thompsg4416 (Aug 18, 2010)

This is crazy talk. I'm pretty open to high risk plays but this doesn't make any sense. The cards are stacked against you. We are at the end of a fantastic run... As many have pointed out the margin of error is slim to none and with the up coming correction(yes it's coming, we just don't know when) it's just asking for trouble. 

Wait for the correction and think about a heloc and then you'll have a chance!


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## gibor365 (Apr 1, 2011)

thompsg4416 said:


> This is crazy talk....
> Wait for the correction and think about a heloc and then you'll have a chance!


but again... how can OP know when correction is done?! it can be 5% ,can 10% or 20%....


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## james4beach (Nov 15, 2012)

Initiating a strategy like this 5.5 years into a bull market, is probably not a great plan. You would be entering a very "crowded trade". Everyone had the same idea as you... and people have been ga-ga crazy for dividend stocks since '09. Getting into a crowded trade at 5.5 years is late by any measure and dangerous.

*Your post also illustrates to us that stock investors are likely more leveraged than we think*. Here you are, planning on taking external loans (not margin loans) to accomplish leveraged stock investing. Stock investors should therefore ask, how much other hidden leverage is being used? How many other people are using LoC, HELOCs, student loans, etc. to finance their stock investments? I suspect it's much more than most of us think. This adds to downside risk for stocks.

Let's suppose for a second that your idea is a good one and it's really this easy to make money with low risk. If it's really that easy, why would the bank lend money to you (at 5% or whatever) if they could make a higher return (6%) in the stock market using your same strategy? I'm making up numbers to illustrate: but you're saying you can make 6%. OK if that's true, why would the bank be stupid and lend to you at 5% instead of going and making that 6% themselves?


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## thompsg4416 (Aug 18, 2010)

gibor said:


> but again... how can OP know when correction is done?! it can be 5% ,can 10% or 20%....


Like James says - like showing up to a house party at 2-3 am. You don't know when it's gonna end - it could be any minute or you could last until the next afternoon. Chances are it's just about over. It's a risky situation.


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## My Own Advisor (Sep 24, 2012)

gibor said:


> but again... how can OP know when correction is done?! it can be 5% ,can 10% or 20%....


Agreed. Nobody I know can predict the future, at least the folks I know.

Maybe folks (here?) who borrow to invest know/think they know. I certainly don't.

If you're going to borrow to invest, at any time, I suppose it would make sense at the start of what you perceive is a strong bull market. Then again, I don't borrow to invest so I don't have to worry about this game.


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## gibor365 (Apr 1, 2011)

My Own Advisor said:


> If you're going to borrow to invest, at any time, I suppose it would make sense at the start of what you perceive is a strong bull market.


You are right 100%, but tell me who can forecast start of "strong bull market." ?! If only I had a time machine.....


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## lonewolf (Jun 12, 2012)

The start of a strong bull market is sure not going to start when NYSE margin debt is close to record highs.


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## Ethan (Aug 8, 2010)

gibor said:


> but again... how can OP know when correction is done?! it can be 5% ,can 10% or 20%....


Earlier this morning the TSX was down more than 5% from the September 3 high of 15,685.13.


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