# Where To Borrow Money To Invest



## Park (Sep 11, 2010)

I'd like to be able to borrow money to invest. An obvious source is a margin account. However, if stocks do poorly, a margin call is possible. Stocks went down 89% in the Depression. With 30% margin, if you were 110% stocks at the peak, you would have gotten a margin call at the trough. So I'm reluctant to use a margin account. I don't own a house, so I'm not eligible for a HELOC. Banks have personal lines of credit. However, TD's my bank, and the limit is $50K and one is charged an inactivity fee. Banks, such as Manulife, have investment loans with no call margin; however, I want to invest in ETFs, and it doesn't look like I can do that with such loans. Any suggestions?


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## Argonaut (Dec 7, 2010)

Borrowing to invest using ETFs is probably not something you should do in general. What you're doing is turning a medium risk, medium reward investment into a high risk, low reward investment. If everything goes wrong, you're in for a world of hurt. And if everything goes right, the interest will still eat into your profits.

If you want to try it, consider small amounts of money that you can afford to lose. Borrow $1000 and use it to make a 0.5% commission trade on Questrade. Make sure it is a short term strategy and cash out your position and repay the loan before interest becomes much of an issue. If you make money, great. If you don't, at least you learned.


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

I don't feel this is a good idea. What investments out there are so good that their returns will pay you for the 6% or so loan interest, fees and your time finding credit to do this with? You would be hard pressed to find an investment that pays more than this.

Banks make a killing off loaning money to people like us. These days, they seem to make more money doing that than on anything else. This includes their stupid fees.

Thumbs down.


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## Square Root (Jan 30, 2010)

You haven't told us your age, goals, net worth, or investing experience. So difficult to judge but on the surface you don't seem to have the experience or skill for your plan. Probably too risky. Save some money first.


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## I'm Howard (Oct 13, 2010)

I want to borrow $300,000 to buy a house, that's O.K, but to do the same thing to put together an Investment Portfolio, that's a bad idea?

STD, Fourth largest Bank in the world, pays a dividend of 7%, gives exposure to the Euro, if you can get a loan of Prime + 1%,iterest only, means you are making 75% return.

Only very experianced investors should use leverage and be comfortable with the possibility of losing 50% of your monies.

Bulls and Bears make money in the markets, Pigs get slaughtered.


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## Park (Sep 11, 2010)

What struck me back in 2008-2009 was that there was a rare stock sale. When the next stock sale occurs, I want to be able to buy the bargains. 

My plan is to use the PE10 ratio. For the last 50 years, the average PE10 and median PE10 of the US stock market has been 19 and 19.4 respectively. The lowest in the last 50 years was 6.64. At present, it is 23.6. In March 2009, the most recent nadir, it was 13.32.

I'm 90% stocks, 10% bonds. When the PE10 reaches 16.5, go 95% stocks. At 15.0, go 100% stocks. At 13.5, go 105% stocks. At 12.0, go 110% stocks. At 9.5, go 115% stocks. At 7, go 120% stocks.


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## avrex (Nov 14, 2010)

I'm not quite following your logic, with respect to using the PE10 ratio.


Park said:


> My plan is to use the PE10 ratio.
> At present, it is 23.6. I'm 90% stocks, 10% bonds.
> When the PE10 reaches 16.5, go 95% stocks.


Your methodology is to use 'leverage' (i.e. borrowed money) to purchase stocks when they become undervalued. Later, when the market recovers, you will make excellent returns. I understand that logic.

However, it seems like you are waiting for a significant drop in the S&P500, at which point you will move from 90% stocks to 95% stocks (an increase in equity position of only 5%)

If the S&P500 is so overvalued at present (vs historical PE10 = 14), why are you 90% in stocks right now? Shouldn't you be lower?


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## andrewf (Mar 1, 2010)

Park said:


> What struck me back in 2008-2009 was that there was a rare stock sale. When the next stock sale occurs, I want to be able to buy the bargains.
> 
> My plan is to use the PE10 ratio. For the last 50 years, the average PE10 and median PE10 of the US stock market has been 19 and 19.4 respectively. The lowest in the last 50 years was 6.64. At present, it is 23.6. In March 2009, the most recent nadir, it was 13.32.
> 
> I'm 90% stocks, 10% bonds. When the PE10 reaches 16.5, go 95% stocks. At 15.0, go 100% stocks. At 13.5, go 105% stocks. At 12.0, go 110% stocks. At 9.5, go 115% stocks. At 7, go 120% stocks.



Building equity is probably your best bet. One of the more compelling reasons to buy a property is that it gives you an asset for inexpensive leverage. I'm still unsure of what impact of the elimination of HELOC insurance will be, however.

If you're looking for margin accounts, Interactive Brokers is the only broker in Canada that I'm aware of that offers reasonable margin rates. Stay away from margin at any of the big brokerages that are charging prime+x. IB bases their rate on a small premium over the overnight rate. It makes sense, because margin lending isn't terribly risky, as it is secured by a highly liquid asset.


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## Park (Sep 11, 2010)

Why am I 90% stocks? Actually, it's about 88% stocks. I'm in the top marginal tax rate and my tax advantaged room is small. At a 46.4% rate, bond returns in an open account aren't good.


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## Larry6417 (Jan 27, 2010)

Park said:


> I want to invest in ETFs, and it doesn't look like I can do that with such loans. Any suggestions?


I'm not sure why you have this impression. My recollection of CRA's interpretion of tax deductibility of investment loans is that the loan must be used to earn interest or dividends. It's a grey area whether common stock that doesn't pay a dividend, but could, would be an eligible investment. However, if your ETF pays a dividend, it should be eligible. See www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html


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## marina628 (Dec 14, 2010)

I really think you should start smaller than $50,000 .You could get caught up and lose significant funds.The most i ever borrowed was $8000 back in 1996 to get a RSP loan and even now with my significant net worth I would never borrow money to invest.I invested $12,500 into three dividend paying stocks in October ,three separate buys through the month $3500 ,$3500 and $5500 and I have made 8% on the face value of my stock in 3 months without considering the dividends.There are still great deals and great returns to be made.
If you really are itching to invest take a loan that you can afford to repay in the next 12-18 months .


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## Park (Sep 11, 2010)

Larry6417 said:


> I'm not sure why you have this impression. My recollection of CRA's interpretion of tax deductibility of investment loans is that the loan must be used to earn interest or dividends. It's a grey area whether common stock that doesn't pay a dividend, but could, would be an eligible investment. However, if your ETF pays a dividend, it should be eligible. See www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html


It's the banks. When I went looking on the net for investment loans without margin call, I ended up on the Manulife site. Yes, they have such loans, but you have to buy their investment products, and that didn't look like it included common stocks such as ETFs. At the website of other banks, I got a similar message.


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## Larry6417 (Jan 27, 2010)

Park said:


> It's the banks. When I went looking on the net for investment loans without margin call, I ended up on the Manulife site. Yes, they have such loans, but you have to buy their investment products, and that didn't look like it included common stocks such as ETFs. At the website of other banks, I got a similar message.


Of course lenders want to lock you into their products! There's no requirement from the CRA excluding ETFs. In fact, lenders have to be quite careful not to run afoul of "tied selling." I took out an investment loan, but it was small compared to my income, and I have no other debts. It was a HELOC (my home is paid off) from BMO, and I placed the money in a BMO Investorline self-directed account. However, the funds are used for ETFs and common stocks.

I suggest you shop harder for lenders. TD or BMO may be quite willing to lend to you if you invest in their ETFs/e-series or use their discount brokerage.


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## ChrisR (Jul 13, 2009)

I have pretty much the same plan as Park.

I am about 90% in equities right now (almost all indexed), and I plan to stay at 90% for the foreseeable future.

If the current strength in equities turns out to be a "sucker's rally" and we have a depression style crash, I will borrow as much money as I can to invest in equities. 

My reasoning is that:
a) I have a very long time horizon, and investing large sums at a low point has a good chance of working out in the long run.
b) If we have a massive crash now, I will lose most of my money, hence I will need to borrow to invest.

Note, that I'm not trying to predict the future here. If I was predicting a crash I would not be invested 90% in equities! I am simply formulating a plan of action for what I will do IF we have a second crash.

I'm sure a lot of you think this plan sounds crazy, but I would point out that its not nearly as crazy as the person who suffers through a second crash and decides to take what's left of their money out of stocks and stuff it under the mattress!


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## Assetologist (Apr 19, 2009)

Correct me if I am wrong but if you are in the top marginal tax bracket without a home you should be able to save a reasonable amount of money each month.

When the next bottom calls out, you should have the means to make a substantial investment and should qualify for margin although as you pointed out this can work against you if armageddon strikes.

Consider positioning your borrowing capacity with a HELOC which of course means buying a house. I borrowed XXX,XXX in 2008/2009 using this pool of funds.

Don't worry about catching the next crash or even the one after that. Have a look at history and see that such opportunities visit the market quite frequently.


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## Eclectic12 (Oct 20, 2010)

Larry6417 said:


> I'm not sure why you have this impression. My recollection of CRA's interpretion of tax deductibility of investment loans is that the loan must be used to earn interest or dividends. It's a grey area whether common stock that doesn't pay a dividend, but could, would be an eligible investment. However, if your ETF pays a dividend, it should be eligible. See www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html


To add to the point - one of the CRA notices explicitly states that unless there was some over-riding factor such as the company stating "dividends will never be paid", they will generally take the view that a company not paying incomed/dividends today is building towards paying income/dividends in the future and is eligible. I noticed that it was not detailed as to other over-riding factors plus have a lot of eligible choices, so I've never strayed into the gray area. 

The other possibility is if the ETF pays return of capital (RoC). In this case, to keep the loan 100% deductible the RoC amounts will have to either be:
a) re-invested in an eligible investment.
b) paid off of the loan plus accrued interest.

Note difficult but extra steps compared to that average dividend paying corporation.


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## KaeJS (Sep 28, 2010)

Not sure if you have tried to look at LOCs from TD Bank,

But recently my LOC was set to 8.55% + prime. Which, is 11.55%, and this is from TD Bank.

You want to borrow money at 11.55% in order to buy stocks?

I am not against the idea. I always borrow money in my Margin Account. In fact, I'm borrowing $4200 right now. But at least it is only at 4.75%.

You will never make money from the stocks if you are borrowing at a high percentage.

$50,000 at 11.55% is $15.82/day. If the stock goes down and you want to hold it, you're going to be paying almost $16/day. If you get a few bad days in a row... that could add up. You'd have to cover your initial loss, plus that huge interest expense.

I understand your reasoning for not wanting a Margin Account, or looking for an alternative. However, I think a Margin Account is the best (and almost only way) to effectively borrow money to buy stocks.


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## Eclectic12 (Oct 20, 2010)

KaeJS said:


> Not sure if you have tried to look at LOCs from TD Bank,
> 
> But recently my LOC was set to 8.55% + prime. Which, is 11.55%, and this is from TD Bank.
> 
> ...


Margin may end up being the best for Park, based on what is posted. 

I disagree that margin is the best. Case in point, your margin rate of 4.75% looks bad to me where I have a 3.00% HELOC rate. *grin*


Another factor that determines the LOC rate is your personal financial picture. Presidents Choice Financial states for their LOC, "The low-cost borrowing account rate is based on prime plus a percentage determined at the time of credit approval." I can't compare today's rates as I'm not using the higher priced LOC but when my HELOC was at 2.25%, my Presidents Choice LOC was something like 5.8%. I'm sure the PCF LOC is much higher now but doubt it is anything like 11.55%.

The key question for Park is whether there is an asset that can be used to get a secured LOC. The HELOC which uses a house as the asset is out but some other asset might work. My sister was able to pledge a GIC in order to get the secured LOC. The key is to have some asset which won't fluctuate like the stocks will.

If not, then as you say, likely Park's only reasonably priced option is the margin account. This may change in the future when there is an asset to get a secured LOC.


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## Bupp (Nov 13, 2009)

If TD is giving you prime + 8.5% you must have a fairly poor credit score. They regularly give out Prime + 3/prime +3.5 on their unsecured lines.

Re: borrowing to invest, I'm all for it.

However, instead of waiting until the market drops to your entry point, why not sell puts at the price levels you are interested in buying at. This will enable you to earn some additional income even if your limit order never gets filled.


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## Bupp (Nov 13, 2009)

another option instead of using margin would be to buy leaps.


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## KaeJS (Sep 28, 2010)

Bupp said:


> If TD is giving you prime + 8.5% you must have a fairly poor credit score. They regularly give out Prime + 3/prime +3.5 on their unsecured lines.


I have perfect credit.

The issue is the age of my credit.

I am only 20 years old, so my credit is not considered to be well established. When I applied for my $5,000 LOC, they also wanted to secure $5,000 of my mutual funds just in case. They are really cracking down.


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## andrewf (Mar 1, 2010)

IB is currently offering LIBOR (basically the overnight rate) + 1.5 on balanced under $110k. That works out to prime - 0.5. Hard to beat.


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## Bupp (Nov 13, 2009)

KaeJS said:


> I have perfect credit.
> 
> The issue is the age of my credit.
> 
> I am only 20 years old, so my credit is not considered to be well established. When I applied for my $5,000 LOC, they also wanted to secure $5,000 of my mutual funds just in case. They are really cracking down.


Sorry if it looked like I was implying you miss payments etc. I merely meant to say that you don't have a good credit score if that is the rate they are offering you. It's not your fault, you haven't had time to build it up yet.


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## KaeJS (Sep 28, 2010)

Bupp said:


> Sorry if it looked like I was implying you miss payments etc. I merely meant to say that you don't have a good credit score if that is the rate they are offering you. It's not your fault, you haven't had time to build it up yet.


No offense taken in the first place, but thank you.


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## Cal (Jun 17, 2009)

Just curious as to whether anyone on here is currently borrowing to invest at prime?


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## Young&Ambitious (Aug 11, 2010)

Just this past week I actually confirmed my HELOC rate and plan to deploy some of it to invest should something I like come up.


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## Ethan (Aug 8, 2010)

Cal said:


> Just curious as to whether anyone on here is currently borrowing to invest at prime?


I have a HELOC that bears interest at prime + 0.75%. I currently have drawn $25,000 which is fully invested in equities and options on those equites. I have a set of stocks who must abide by my following rules:

1. free cash flow consistently exceeds their dividend payments (my way of ensuring the dividend is stable)
2. dividend yield exceeds my interest rate (3.75%)
3. options are traded on the stock

I sell puts to establish positions, and sell calls on my positions once established. If the stock goes down in price, I'm comfortable holding the position because the dividends received more than cover the interest.

With preferrential tax treatment for dividends and capital gains (sales of calls/puts plus gains when calls are exercised) this strategy has shown to be profitable and tax efficient for me. Once interest rates start rising, and stable dividend payers yield less than my interest rate, I'll likely wind down the portfolio.


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## CanadianCapitalist (Mar 31, 2009)

I'm not borrowing to invest but I have a secured Line of Credit at Prime + 0.5% instead of a mortgage.


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## andrewf (Mar 1, 2010)

For those interested in getting low cost leverage, look into Interactive Brokers. IB offers margin rates at ~2.5% (for CAD), effectively Prime-0.5. No bank will beat that. Only downside is the potential for a margin call. For this reason you would either need to have some equity in the portfolio (cash contribution) or combine it with other borrowing (such as a HELOC) that does not have the potential for a margin call.


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## Sampson (Apr 3, 2009)

I still have a mortgage WHILE investing, so I'm am leveraging into my investments.

We specifically kept our down payments low in order to have cash on hand during the great recession. No HELOC or non-secured LOC for investing yet, in the works for the future though.


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## Navigate Sensibly (Oct 24, 2011)

KaeJS said:


> I have perfect credit.
> 
> The issue is the age of my credit.
> 
> I am only 20 years old, so my credit is not considered to be well established. When I applied for my $5,000 LOC, they also wanted to secure $5,000 of my mutual funds just in case. They are really cracking down.


20 years old? Wow, good for you. Plenty of time to invest when you start so early. But this also explains why you do margin and day-trade so much eh? Too much ambition. Ha!


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## Snuff_the_Rooster (Oct 26, 2012)

*Jybmeb*



andrewf said:


> For those interested in getting low cost leverage, look into Interactive Brokers. IB offers margin rates at ~2.5% (for CAD), effectively Prime-0.5. No bank will beat that. Only downside is the potential for a margin call. For this reason you would either need to have some equity in the portfolio (cash contribution) or combine it with other borrowing (such as a HELOC) that does not have the potential for a margin call.


I like how you think. For those willing to control the risk, the powers that be are almost forcing you to go out and margin on the cheap because the buy button seems to be always on at the Fed. It's been a great ride I must admit.


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## Cal (Jun 17, 2009)

I had been looking into this at prime, not call-able as per the margin account mentioned prior which was prime-.5 mentioned by Andrew, it is variable unlike the prime+.5 mentioned by CC:
http://www.canequity.com/home_line_of_credit.stm

Seems like it would be the going rate, I guess you get what you pay for.


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## Doug2000 (Apr 6, 2011)

You should only borrow to invest when there is blood in the streets, unless you have a crystal ball.


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## dvelecka (Oct 18, 2012)

Hi Park,

I am in the same boat as I would like to invest in real estate but now with the new mortgage rules in Canada it is very difficult to quality for a mortgage because the rules are now much stricter. How is it going for you? Does anyone have suggestions?


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## hboy43 (May 10, 2009)

Hi:

To the original question, I would set up a personal LOC at whatever ugly rate it came to be. This would be just for backstop purposes. Then I would do my actual borrowing in a margin account at much more favourable rates. If SHTF, the margin account can receive a transfusion of cash from the LOC.

Part 2 of the plan is to go easy on the margin. I wouldn't want to need a transfusion unless things dropped at least 25%, and preferably more. Otherwise you run the risk of dying a death by a thousand cuts.

hboy43


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## andrewf (Mar 1, 2010)

The most margin I would be comfortable with is 33% (ie, 2 parts equity to 1 part margin). This would allow you to weather a 33% draw down before a margin call. You could borrow the other 2 parts, but I would do it from a mortgage (better--not callable if in good standing) or LOC (could theoretically be called when you need it most, though this has not reportedly been done in practice).


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## Cal (Jun 17, 2009)

I am leaning towards CanEquity’s New Home Line of Credit Mortgage mentioned in the link above. I like that it is not call-able. And can live with it being variable at prime. (although I may not like where prime is in a few years, but I guess I could always buy it out if I don't like the prime interest rate)


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## Cal (Jun 17, 2009)

Just thought I would post the link to the IB that andrew had mentioned:

http://www.interactivebrokers.ca/en/index.php?f=202


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