# Borrowing from LOC to invest HISA



## johnnoandy (Sep 4, 2014)

Hi, I'm in a fortunate position where as a perk of the company I work for, I can borrow up to $350K at only 1%. I'm looking at maxing this out and just dumping all the money in a High Interest Savings account that pays 1.6%. My calculations indicate I'd make $2,100 a year for basically doing nothing. Of course, I could do a lot better by investing the money, but I have a lot in high risk investments now, so don't need any more risk in my portfolio.

Is this free money too good to be true? I assume from a tax perspective, this would be taxed as gains on income. Assuming this is correct, how do I calculate what it would likely cost me? Also, what would be the credit file impact of borrowing this amount for this purpose. I would be paying the interest back on a monthly basis... is it just the same as having a mortgage for this amount? (I've paid off my mortgage and have no other debt).

Thoughts and input would be appreciated!


----------



## SkyFall (Jun 19, 2012)

If I am not mistaken, asuming a HELOC, if your payment commitment is interest only, yes you can make free money. If you have to pay back any principal, it won't work. Your principal portion should be way more than the intesrest earned.


----------



## johnnoandy (Sep 4, 2014)

SkyFall said:


> If I am not mistaken, asuming a HELOC, if your payment commitment is interest only, yes you can make free money. If you have to pay back any principal, it won't work. Your principal portion should be way more than the intesrest earned.


Thanks... it would be a HELOC, yes. There is no principal to be paid back. Thoughts on tax / credit file implications?


----------



## james4beach (Nov 15, 2012)

We have a recent thread that asks why retail investors tend to not make (much) money
http://canadianmoneyforum.com/showthread.php/45026-Theory-why-average-investors-don-t-make-money

I pointed out that retail investors engage in risk propositions that corporations (like bank traders) never would. I think the HELOC is one example. A bank trader would never borrow against his own home to speculate in the stock market. You're using your HOME as collateral against speculative investments!

A banker would only borrow with other people's money. Just food for thought


----------



## RBull (Jan 20, 2013)

^Do you consider a bank high interest savings account a speculative investment?


----------



## AMABILE (Apr 3, 2009)

he's not using his home as collateral- it's a company perk


----------



## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... I pointed out that retail investors engage in risk propositions that corporations (like bank traders) never would. I think the HELOC is one example. A bank trader would never borrow against his own home to speculate in the stock market. You're using your HOME as collateral against speculative investments!


Others have pointed out that it's not HELOC.

As for the corps ... that may be true but it does not seem to be all that enforced. I've heard discount broker phone reps talking about how their salary is not great but access a fast trading platform as well as company margin has meant their side trades are a much larger income.


Cheers


----------



## Alphonse (May 27, 2015)

*factors to consider*

What happens if you cease to work there? (lay-off or other mishap.) I assume the loan would become due? Or the interest rate would revert to "normal" (market) levels. In this case, you're absolutely right to keep your investment/savings highly liquid, and (virtually) risk-free.

I'm not a tax expert, but I believe your $350k @ 1% would be a taxable (employment) benefit, which would be taxed at your marginal tax rate. However, you may be able to deduct this interest from your taxes since the loan is for investment purposes. Then, of course, whatever interest you earn would be taxed.

I'd ask a Financial Planner or accountant about it to have some piece of mind.


----------



## KevinWaterloo (Mar 5, 2015)

james4beach said:


> We have a recent thread that asks why retail investors tend to not make (much) money
> http://canadianmoneyforum.com/showthread.php/45026-Theory-why-average-investors-don-t-make-money
> 
> I pointed out that retail investors engage in risk propositions that corporations (like bank traders) never would. I think the HELOC is one example. A bank trader would never borrow against his own home to speculate in the stock market. You're using your HOME as collateral against speculative investments!
> ...


What is wrong with borrowing against your home for investment purposes? I wouldn't recommend it if you wouldn't be able to handle the debt if the investments went completely sour (ie 2008) but it can be a productive way to increase your investment footprint. I have been doing that for years (even through 2008) and I'm still happy with the decision. And I'm still paying prime. Just make sure you have a 'clean' paper trail and appropriate documentation in case the CRA ever asks.


----------



## Numbersman61 (Jan 26, 2015)

johnnoandy said:


> Hi, I'm in a fortunate position where as a perk of the company I work for, I can borrow up to $350K at only 1%. I'm looking at maxing this out and just dumping all the money in a High Interest Savings account that pays 1.6%. My calculations indicate I'd make $2,100 a year for basically doing nothing. Of course, I could do a lot better by investing the money, but I have a lot in high risk investments now, so don't need any more risk in my portfolio.
> 
> Is this free money too good to be true? I assume from a tax perspective, this would be taxed as gains on income. Assuming this is correct, how do I calculate what it would likely cost me? Also, what would be the credit file impact of borrowing this amount for this purpose. I would be paying the interest back on a monthly basis... is it just the same as having a mortgage for this amount? (I've paid off my mortgage and have no other debt).
> 
> Thoughts and input would be appreciated!


At the present time, the prescribed interest rate for employee loans is 1%. If you receive a loan with a rate lower than the prescribed rate, the interest difference is a benefit from employment. So if the prescribed interest rate changes, your employee loan will also likely increase. The interest you pay is deductible if you use the proceeds to make investments. With regards to investing in bank high interest savings accounts, just make sure don't invest over $100,000 with any one bank. All bank savings accounts up to that amount are guaranteed by the Canadian government.


----------



## cainvest (May 1, 2013)

Numbersman61 said:


> With regards to investing in bank high interest savings accounts, just make sure don't invest over $100,000 with any one bank. All bank savings accounts up to that amount are guaranteed by the Canadian government.


I believe the CDIC $100k insurance is a little more complicated than that, as in, if the HISA is issued through another institution (or possibly different account type) each *may* have their own $100k coverage.


----------



## SkyFall (Jun 19, 2012)

CDIC rules is $100k per entity! Like for TD, they have 4 entities, which mean you can be covered for total of $400k assuming it is split in the 4 entities (in Quebec 3 entities). I don't know how many entities the other banks have, but it's a comment mistake people make when they refer to CDIC and what's covered.


----------



## Numbersman61 (Jan 26, 2015)

cainvest said:


> I believe the CDIC $100k insurance is a little more complicated than that, as in, if the HISA is issued through another institution (or possibly different account type) each *may* have their own $100k coverage.


Here is link to the CDIC website. 
http://www.cdic.ca/DepositInsurance/FAQTop10/Pages/default.aspx


----------



## SkyFall (Jun 19, 2012)

Here you go the 4 entities with TD that are covered by CDIC

https://www.tdcanadatrust.com/products-services/index.jsp

Here is a list of CDIC members, you can see that the Big Five have more than one entity:

http://www.cdic.ca/Pages/Members.aspx


----------



## gardner (Feb 13, 2014)

SkyFall said:


> the Big Five have more than one entity


Yes, but the big-5 do not have HISA offerings that make this whole thing feasible. To make 1.6% or 2% you'd have to be in the HT, Oaken, PT, PC or maybe Tangerine space. And with these you don't have the diversity of legal CDIC entities inside. Or even CDIC in some cases.


----------



## johnnoandy (Sep 4, 2014)

Thanks all for your feedback! To answer a few of the questions that came up...

1. Even though it's a company perk, it's still secured against my home. Thus, it's a HELOC... given I'm talking about putting the money in a savings account, I'm having a hard time understanding where there's any risk. If the LOC rate increases, the savings rate decreases, I lose my job... whatever, I just transfer the money back to the LOC and pay it off.
2. If I leave the company, I lose the rate. It would stay in the same accounts but at the Joe Public rate. If that were to happen, I'd simply transfer the money from the savings account back to the LOC - paying it all off. Seems pretty straightforward to me.
3. Both the LOC and the Savings account are with the company I work for, not a third party.

OK, I can probably figure out the tax implications... what about credit file impact? Is there any risk to do doing from that perspective, or is it the same as having a mortgage at $350K?


----------



## SkyFall (Jun 19, 2012)

gardner said:


> Yes, but the big-5 do not have HISA offerings that make this whole thing feasible. To make 1.6% or 2% you'd have to be in the HT, Oaken, PT, PC or maybe Tangerine space. And with these you don't have the diversity of legal CDIC entities inside. Or even CDIC in some cases.


of course the big-5's interest rate on HISA is pretty low, my point was just to say that $100k per bank isn't actually correct.


----------



## 307169 (May 24, 2015)

johnnoandy said:


> Thanks all for your feedback! To answer a few of the questions that came up...
> 
> 1. Even though it's a company perk, it's still secured against my home. Thus, it's a HELOC... given I'm talking about putting the money in a savings account, I'm having a hard time understanding where there's any risk. If the LOC rate increases, the savings rate decreases, I lose my job... whatever, I just transfer the money back to the LOC and pay it off.
> 2. If I leave the company, I lose the rate. It would stay in the same accounts but at the Joe Public rate. If that were to happen, I'd simply transfer the money from the savings account back to the LOC - paying it all off. Seems pretty straightforward to me.
> ...



Credit utilization rate influence credit record; if you max out your LOC, or any type of credit, credit record may be impacted.


----------



## CPA Candidate (Dec 15, 2013)

RBull said:


> ^Do you consider a bank high interest savings account a speculative investment?


Considering the messenger, yes.


----------



## oob (Apr 4, 2011)

CPA Candidate said:


> Considering the messenger, yes.


What's the risk? OP could withdraw money from HISA and repay HELOC at any time.
You'd have to be crazy not to take advantage of this IMO.


----------



## johnnoandy (Sep 4, 2014)

Digging up this old thread. Life got in the way, and I never ended up doing anything. Looking at finances again in general for RRSP season, and will probably go ahead now. My only concern is implications to credit file of maxing out my LOC. That said, I've paid of my mortgage and have no other debt. This would be only debt. Should I be concerned about this?


----------



## 0xCC (Jan 5, 2012)

Are you going to need to borrow money for anything else while the LOC is maxed out?

I didn't go back and read the rest of the thread so this may have been covered but you should be aware that borrowing to invest in an RRSP doesn't allow the interest to be deducted.


----------



## rsyl (Aug 15, 2014)

0xCC said:


> Are you going to need to borrow money for anything else while the LOC is maxed out?


I'm curious why you would borrow from anyone else, even if the need did arise.

Take the money out of the HISA and use that for whatever it is you NEED, you won't find a loan cheaper than 1% (except maybe car loan).


----------



## Eclectic12 (Oct 20, 2010)

rsyl said:


> I'm curious why you would borrow from anyone else, even if the need did arise.


As I read it ... the concern is that the HeLOC will be maxed, allowing nothing further to be borrowed at the cheap rate.

If there was a need, to borrow ... one would have to use something else (or worst case, liquidate some of the investments).


Cheers


----------



## 0xCC (Jan 5, 2012)

My question about needing to borrow more money was mostly related to credit score changes due to the fact that the HELOC is maxed. Presumably this would mean that a large portion of available credit was in use which could have a negative impact on credit score.


----------



## nobleea (Oct 11, 2013)

0xCC said:


> Are you going to need to borrow money for anything else while the LOC is maxed out?
> 
> I didn't go back and read the rest of the thread so this may have been covered but you should be aware that borrowing to invest in an RRSP doesn't allow the interest to be deducted.


Also, I may be mistaken, but borrowing to invest in savings accounts or fixed income means loan interest is not deductible.


----------



## Joe Black (Aug 3, 2015)

0xCC said:


> My question about needing to borrow more money was mostly related to credit score changes due to the fact that the HELOC is maxed. Presumably this would mean that a large portion of available credit was in use which could have a negative impact on credit score.


Since he's putting the money in a HISA, 100% of it is available for any new unanticipated expenses. He won't need other credit!

I also don't get all the comments about the loan interest not being deductible. So what, he still gets the difference between the 1% and whatever he gets in the HISA. It's free money.

BTW, there are better rates than 1.6%, ZAG has 2.5% and EQ is 3%. Not CDIC insured, but insured by the provinces (at least for ZAG I know).


----------



## Spudd (Oct 11, 2011)

Joe Black said:


> BTW, there are better rates than 1.6%, ZAG has 2.5% and EQ is 3%. Not CDIC insured, but insured by the provinces (at least for ZAG I know).


Actually both are CDIC insured.


----------



## 0xCC (Jan 5, 2012)

Joe Black said:


> Since he's putting the money in a HISA, 100% of it is available for any new unanticipated expenses. He won't need other credit!
> 
> I also don't get all the comments about the loan interest not being deductible. So what, he still gets the difference between the 1% and whatever he gets in the HISA. It's free money.
> 
> [...]


I was responding to the question about any credit file implications related to maxing out the LOC.

On the "free money" part, it isn't as simple as HISA interest rate - HELOC interest rate = free money. HISA interest is pre-tax and HELOC interest is paid with after tax dollars if the HELOC interest can't be deducted (which I am not 100% clear on). So it is possible depending on marginal tax rates and the interest rate difference between the HISA and HELOC that there is no free money available.


----------



## Eclectic12 (Oct 20, 2010)

0xCC said:


> My question about needing to borrow more money was mostly related to credit score changes due to the fact that the HELOC is maxed. Presumably this would mean that a large portion of available credit was in use which could have a negative impact on credit score.


I haven't maxed it ... but the credit agencies and whomever is querying them seem to know there are assets making the HeLoc amount irrelevant. The number of unsolicited letters for financial products increased dramatically as the portfolio value grew. 

Certainly I have a lot of credit that I didn't have before I borrowed.




nobleea said:


> Also, I may be mistaken, but borrowing to invest in savings accounts or fixed income means loan interest is not deductible.


From what I recall the time I read through the details, the Finance dept wanted CRA to be ensuring the return would outweigh the interest. CRA OTOH felt their time was better spent going after cheats. 

I haven't had to worry about it as dividend/cash distribution growth has ensured the payments are larger than the interest charge that has dropped.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

Joe Black said:


> Since he's putting the money in a HISA, 100% of it is available for any new unanticipated expenses. He won't need other credit!


On paper ... but should the unanticipated expense exceed the interest payment, whatever the excess is will also trigger a need to pay back the loan to keep it 100% tax deductible.




Joe Black said:


> I also don't get all the comments about the loan interest not being deductible. So what, he still gets the difference between the 1% and whatever he gets in the HISA. It's free money.


Won't keeping the interest tax deductible help with the tax owing on the interest income?

Interest paid is 1.6% x $350K which works out to $5600. The 1% interest charge whittles this down by $3500 to the $2100 mentioned in post #1.
But that is not the after-tax situation, is it?

For Ontario, at the lowest tax level - the $5600 is more like $4480 which the interest charge will whittle down to $980.

So yes, it could work without the interest charge being a tax deduction ... but why would one want to give the gov't back $1120 or more where one can avoid it?

I am pretty sure the $350K won't fit in a TFSA.


Cheers


----------

