# Borrowing to invest in a TFSA?



## Electric (Jul 19, 2013)

I have been thinking of building a small margin position of $25k over the coming year, about $2500 per month. My hurdle rate is 3.5% (what I pay to my HELOC). I have about $25k of room in my TFSA. Would it be better to invest within the TFSA and so protect myself from capital gains, or in the alternative invest in an unregistered account so I can claim any suffered losses and deduct the interest?

I intend to invest in about 35% TDB900 (TSX), 25% VTI (US broad market), 20% CBO (short-medium corporate bonds), and 20% VXUS (international), all low-cost index ETFs.


----------



## andrewf (Mar 1, 2010)

Borrowing to buy a bond fund is a head scratcher if you ask me.

I never understood the 'lose your ability to claim capital loss' critique of TFSAs. The idea is to invest if you expect a gain. Anyway, it makes sense to invest in your TFSA if you have room rather than non-reg.


----------



## Butters (Apr 20, 2012)

I would only recommend this if we saw a 30%+ drop in the markets

Imagine if you take out this loan, and the markets get hit.

The markets are high right now, everyone's excited and making money, but it could turn at any second.

Right now is not the time to take out a loan when the markets are near all time high. IMO


----------



## wendi1 (Oct 2, 2013)

Yeah, I don't get it either. If you can afford to pay a loan monthly, why not just put that amount away in your TFSA? Less risk, less messing about. 

Your allocation seems fine to me, as long as you don't need the money in the short term.


----------



## Guban (Jul 5, 2011)

Don't forget that you can't deduct the interest cost when you borrow to invest in a TFSA.


----------



## Electric (Jul 19, 2013)

andrewf said:


> Borrowing to buy a bond fund is a head scratcher if you ask me.


Understood, but the idea is to reduce volatility not to make money on that part of the portfolio. I don't think anybody is making money on FI right now.



SheaButters said:


> I would only recommend this if we saw a 30%+ drop in the markets


I was planning to wait for a 10% pullback sometime this year before starting. Also, easing in over 6-12 months is what my CFA friend recommends, as opposed to piling in with a lump sum. 



wendi1 said:


> Yeah, I don't get it either. If you can afford to pay a loan monthly, why not just put that amount away in your TFSA? Less risk, less messing about.


I don't have to pay back any principal monthly. Interest only.



> Your allocation seems fine to me, as long as you don't need the money in the short term.


I don't need the money for 20 years. 



Guban said:


> Don't forget that you can't deduct the interest cost when you borrow to invest in a TFSA.


Understood, that is why I am asking for insights as to whether it is better to do this in a non-reg account.

____

The other point that I thought someone would mention is that the upside potential is higher within the TFSA because there is no capital gains tax involved.


----------



## wendi1 (Oct 2, 2013)

You have to pay the principal back at some point. And interest rates, guaranteed, will not be this low for twenty whole years. 

So, if equity markets tank, say 30%, what do you think happens? If equity markets go up another 20%? If interest rates stay low? If interest rates spike? Why would you put yourself through that? 

Save first, invest second.


----------



## RBull (Jan 20, 2013)

Can't understand the borrowing part for this and especially on the bond part. Just make contributions you can afford on an index fund and dollar cost average.Too risky otherwise.


----------



## Canadian (Sep 19, 2013)

I wouldn't recommend leveraging for an index strategy. If you plan to contribute over time, why not invest your savings?


----------



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

Listen to wendi1. She gets it.


----------



## Electric (Jul 19, 2013)

wendi1 said:


> You have to pay the principal back at some point.


I don't understand your point. Could you elaborate? I can borrow this money forever, paying only the interest. Until then, I control it and can make it work for me.



> And interest rates, guaranteed, will not be this low for twenty whole years.


Sure, but for now my hurdle rate is 3.5%. That is quite low.



> So, if equity markets tank, say 30%, what do you think happens? If equity markets go up another 20%? If interest rates stay low? If interest rates spike? Why would you put yourself through that?


If equity markets tank 30% in 12 months when I am all-in, I have a paper loss of $7500. That is two weeks' take home pay. If my hurdle rate increases to the point where it's no longer profitable to maintain the position, I will simply unwind the leverage.



> Save first, invest second.


You all seem to be against leverage qua leverage. I put it to you that there are good reasons to use small amounts of leverage. My colleague, who borrowed $100k 4 years ago to invest with, is sitting on enough unrealized profit to buy a Benz.


----------



## Butters (Apr 20, 2012)

Electric said:


> You all seem to be against leverage qua leverage. I put it to you that there are good reasons to use small amounts of leverage. My colleague, who borrowed $100k 4 years ago to invest with, is sitting on enough unrealized profit to buy a Benz.


that was also at the bottom of the collapse...

why would you ever get into debt, to have paper in another area

I agree in simple math it looks like a great idea, especially if you find some well known companies that dividends yield more than your loan rate (ex. FTS is over 4% yield and increased their dividend 41 years), then it's almost a no brainier...

But, when the market drops 40% you will be on the tail end of your buddies Benz.
it will take an 80% growth to earn back what you've lost

Like I said before, only get into debt if the markets collapse big time.

BORROWING to earn interest when the markets are at an ALL TIME END is stupid.

Be patient, a drop could occur in 1 month, in 1 year, in 2 years... sit back save now... decide on borrowing when things get exciting.


----------



## richard (Jun 20, 2013)

I'm doing something similar, so I won't try to talk you out of it  It sounds like there's not much risk since this is a small amount compared to your income. And if you use a HELOC you aren't going to get margin calls so you just need to wait it out. Rising interest rates on the loan aren't necessarily a problem if dividend payments and market prices are increasing faster.

Whether the TFSA is best depends on your personal details. If the HELOC is set up so you can deduct the interest then you save 45 - 50% of the interest cost. So if you borrow $25k at 3.5% you can save about $440 in taxes per year. I'm using mostly Canadian stocks for the non-registered part (other accounts balance this out) to make it more tax-efficient. The dividend yield is around 2.5 - 3% so the taxable dividends would be $750 per year. I only know the marginal rates on non-eligible dividends from memory so I'm not sure what the extra tax is. Plus you have the capital gains. At worst, if you sold every year, you would pay half your normal tax rate. Assuming you get 4% growth per year that's about $250 in taxes. If your marginal tax rate on dividends is less than 25% then you're saving a bit with a non-registered account.

There are a few things I'm doing differently. First I have no bonds. Leverage increases volatility so there's not much reason to do that while decreasing volatility unless you can find tax-efficient fixed income that yields more than the cost of borrowing. Second I'm not waiting to put it to work. No one know what will happen in the next year and markets generally rise over time, so waiting is a gamble. I wouldn't be borrowing to invest if I wasn't ok with investing it all in the market today.


----------



## Westerly (Dec 26, 2010)

"Whether the TFSA is best depends on your personal details. If the HELOC is set up so you can deduct the interest then you save 45 - 50% of the interest cost."

Can you elaborate on this?

Thanks


----------



## 0xCC (Jan 5, 2012)

Westerly said:


> "Whether the TFSA is best depends on your personal details. If the HELOC is set up so you can deduct the interest then you save 45 - 50% of the interest cost."
> 
> Can you elaborate on this?
> 
> Thanks


The sentence after that one explains it. If you invest with what CRA determines to be a reasonable expectation of earning income you can deduct the interest from your income (not only your investment income) thus "saving" the marginal tax rate of the interest paid. If you don't happen to be in the 45-50% tax bracket you won't save that much.

Edit: The investment has to be in a non-registered account which is what I assume is meant by the "If the HELOC is set up so you can deduct the interest " part of the statement.


----------



## wendi1 (Oct 2, 2013)

I am not completely against leverage - I borrowed for my house, for example. 

But the fact that you are planning (!) to sell your investments if there is a significant drop in the market is a guarantee of disaster. Given enough time, there will be both significant gains and drops in the stock market. You must not plan as if there are only gains, or as if interest rates will always be low.

The best time to buy with leverage is after one of these significant drops, but few have the fortitude to do it.


----------



## Electric (Jul 19, 2013)

Thanks for your post, richard. 5% dips seem to come a few times per year, 10% a little more rarely; the plan is to start on an event like that. Hopefully easing into it over the course of 6 months to a year will attenuate the risk associated with investing a lump sum all at once. You make a good point about volatility.

wendi, saying that I would unwind the position on the basis of expected returns not being sufficiently above a higher hurdle rate, is not the same thing as what you impute.


----------



## OurBigFatWallet (Jan 20, 2014)

wendi1 said:


> I am not completely against leverage - I borrowed for my house, for example.
> 
> But the fact that you are planning (!) to sell your investments if there is a significant drop in the market is a guarantee of disaster. Given enough time, there will be both significant gains and drops in the stock market. You must not plan as if there are only gains, or as if interest rates will always be low.
> 
> The best time to buy with leverage is after one of these significant drops, but few have the fortitude to do it.


I agree. Any plan that involves selling on a downturn is bad news (in my opinion)


----------



## Electric (Jul 19, 2013)

Again, not selling on a downturn. But if the interest paid rose to the point where it overwhelmed the reasonably expected annual percentage gains, I would certainly unwind the leverage by paying the loan back. This could happen if we had an interest rate environment like the early 80s, for example.


----------



## Longwinston (Oct 20, 2013)

If you really have $7500 take home pay every two weeks - why do you need to borrow 25k?


----------



## Electric (Jul 19, 2013)

Nobody said "need." The expected return of that basket of investments is twice the interest rate I'd pay. Half the GTA has a $300k mortgage, I am only talking about leverage of $25k!

Does anyone else have any insights as to whether it is better to use the TFSA or an unregistered account? Right now, I am leaning towards unreg because I can deduct ~46% of the interest, and also claim any capital losses.


----------



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

I am not sure we can help you, Electric. Several of us have told you this is a bad idea but you seem to have made up your mind and rather than to listen you just keep talking and trying to justify and further explain what you want to do. You will find very little support for voluntarily taking on debt, here in CMF. Your entire concept is one huge flaw as we keep trying to tell you.


----------



## Electric (Jul 19, 2013)

the-royal-mail, I am not asking for anyone's opinion about whether leveraging is a good idea. In this thread, I am simply asking about where the purchased assets should be located - in a TFSA or in an unregistered account. Do you have any information to bring in this regard?


----------



## richard (Jun 20, 2013)

Electric said:


> Thanks for your post, richard. 5% dips seem to come a few times per year, 10% a little more rarely; the plan is to start on an event like that. Hopefully easing into it over the course of 6 months to a year will attenuate the risk associated with investing a lump sum all at once. You make a good point about volatility.


That might work. It might even work 49% of the time (that seems unlikely). I still prefer giving myself a better chance of success though, especially when I'm increasing the risk level. If you're using this strategy you should be ok with not choosing the best possible day of the year to invest because you won't.

If there's a serious correction you can always borrow more then. For anything you plan to do now you're only limiting yourself by waiting.


----------



## EndersGhost (Jan 20, 2014)

Not to hijack this thread, but on the topic of RESP's, does the $500 government grant count towards the $50,000 limit? So every year you must contribute $2500 to get the $500 match. In Alberta, I was given an additional $500 due to the ACES grant. Does this $1000 count towards the $50,000?


----------



## richard (Jun 20, 2013)

EndersGhost said:


> Not to hijack this thread, but on the topic of RESP's, does the $500 government grant count towards the $50,000 limit? So every year you must contribute $2500 to get the $500 match. In Alberta, I was given an additional $500 due to the ACES grant. Does this $1000 count towards the $50,000?


If you calculate the difference in marginal tax rates... oh wait, wrong thread


----------



## andrewf (Mar 1, 2010)

EndersGhost said:


> Not to hijack this thread, but on the topic of RESP's, does the $500 government grant count towards the $50,000 limit? So every year you must contribute $2500 to get the $500 match. In Alberta, I was given an additional $500 due to the ACES grant. Does this $1000 count towards the $50,000?


Start a new thread. This is not even tangentially related.

Electric, I would say max the TFSA. Tax free return is better than deductible interest.


----------



## EndersGhost (Jan 20, 2014)

Woops sorry, I meant to post in the other TFSA thread that's more relevant to amounts and withdrawals etc. Sorry about that.


----------



## My Own Advisor (Sep 24, 2012)

Electric said:


> .....I am simply asking about where the purchased assets should be located - in a TFSA or in an unregistered account.


I would always try and use up any registered account room before non-registered. That said, I haven't really followed my own advice. I recall I have about $12k of RRSP contribution room left. I hope to have that used up over the next 5 years. I have TFSA maxed, largely by moving non-reg. investments to TFSA every January.


----------



## FrugalTrader (Oct 13, 2008)

Electric said:


> I am simply asking about where the purchased assets should be located - in a TFSA or in an unregistered account. Do you have any information to bring in this regard?


From personal experience, if you are going to borrow to invest for the long term, then I would put it in Non-registered (for the reasons you mentioned - tax deductibility, capital loss) and use your savings to max out your registered accounts.


----------



## andrewf (Mar 1, 2010)

I'm operating on the assumption that OP has no savings to put in the Tfsa.


----------



## Electric (Jul 19, 2013)

FrugalTrader said:


> From personal experience, if you are going to borrow to invest for the long term, then I would put it in Non-registered (for the reasons you mentioned - tax deductibility, capital loss) and use your savings to max out your registered accounts.


Thanks for that. I can max out the TFSA in 10 months from current monthly savings.


----------



## Synergy (Mar 18, 2013)

^ That's what I would do - max your registered accounts with your own savings and play the margin game in a non-registered account. I've been tempted to do just that as I currently have zero debt, but I'm happy to patiently wait on the sidelines for a better future opportunity.


----------



## My Own Advisor (Sep 24, 2012)

Yeah, I wouldn't play a margin game as you put it in TFSA or RRSP. Just me but I also don't borrow to invest yet.


----------



## Synergy (Mar 18, 2013)

I don't think it's a great time to borrow to invest (LOC) or run on margin. Potential rising rate environment, markets fairly valued reaching all time highs, etc. Give me a heads up when the next 2008-9 crash comes along and I'll re-consider )


----------

