# Borrowing money to invest , have any body have experience with that ?



## inverstmentmentjinja (Nov 25, 2013)

So today I got offer of line of credit with fixed interest rate of 3% , and while the market is now growing , I thought in inversting in some safe portfolio that will give me around 7% annual growth , so I will earn 4% . 
does any body tried that ?


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## avrex (Nov 14, 2010)




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## KrissyFair (Jul 8, 2013)

Was it a flyer from TD by any chance? Because we got one too. 

So for starters, what avrex said. There's no "safe" portfolio. So you have to decide what you would do if you couldn't repay the principal. Also, in the mean time, you'll be on the hook for at least monthly interest payments, but your investments - if they have yield - will most likely pay quarterly. Do you have the cash to cover the interest?

It's not a totally crazy idea in and of itself when the interest rate is that low, but you need to be risk tolerant and have enough other assets that you can repay the loan even if this portfolio tanks.


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## inverstmentmentjinja (Nov 25, 2013)

@KrissyFair: For sure there is no safe investment , but what I mean some low risk portfolio funds that grow slower but safer , I would borrow the amount that I can pay at least 50% of it from my asset in case any pull back happened that reduce the investment amount. Ideally I want to borrow 20000, which look reasonable amount to me , and even will 25% fell I can make it up and return the amount . 
what really hold me back is that a correction might come at any time ti kill all the growth that happened in this year , I have read if any year the growth is more than 10% then expect a correction to come . or I ll do my plan that I cache the gain from time to time to take some money out of game , in this case I ll be able to pay interest and also would done some cache that will make up to any drop.
and yes it was flyer .


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## doctrine (Sep 30, 2011)

What do you propose to invest in, i.e. what exactly is the 'low risk portfolio fund' that you refer to?


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## avrex (Nov 14, 2010)

@inverstmentmentjinja, my attempt at humour above, was to make sure that you were aware of the risks involved.
From what you just wrote, it sounds like you are aware and accept these risks.

I will admit that I used the same strategy when I was your age (30).
At that time, I didn't have much in the way of cash or assets, so I utilized a personal line of credit in order to do some investing.
Two year later, when my assets had appreciated a bit and I saved some money, I paid off the line of credit.
One advantage of this strategy, in a non-registered account, is that Section 20(1)(c) of the federal Income Tax Act (ITA) states that interest on borrowed money is tax-deductible. However, the taxable benefit shouldn't be the 'main' reason to use this strategy.

I just wanted you to understand that *"leverage is a double-edged sword"*.


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## Causalien (Apr 4, 2009)

inverstmentmentjinja said:


> So today I got offer of line of credit with fixed interest rate of 3% , and while the market is now growing , I thought in inversting in some safe portfolio that will give me around 7% annual growth , so I will earn 4% .
> does any body tried that ?


Sounds fishy. I've used line of credit to invest before, in fact I try to keep my net worth composed of at least 20% of borrowed money and pay it back near my predicted market top every 7 years. Line of credit are usually variable so when I hear a fixed 3% rate my spidey sense tingles. What is the catch and be careful. If you can post the info here, we can pour over the condition to see if it is a good deal. Mind you, the reason why line of credit is useful vs a brokerage margin is that you don't have to force sell during a margin call. If the rate is fixed, there must be an attached condition.


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## james4beach (Nov 15, 2012)

avrex said:


> One advantage of this strategy, in a non-registered account, is that Section 20(1)(c) of the federal Income Tax Act (ITA) states that interest on borrowed money is tax-deductible.


The wording says that borrowed money has to be used to earn _income_, so dividends or interest income. Using leverage for a dividend strategy is clearly acceptable, but I'm not sure about a strategy that is meant to produce capital gains. Anyone know? Does any strategy using stocks qualify for this because, theoretically, stocks have the _potential_ to produce income?

http://www.advisor.ca/my-practice/i...nterest-deductibility-be-mindful-of-roc-99887


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

It's a bad idea. No one will guarantee you 7% but by taking out a loan you are guaranteeing the bank 3%. Do you see now why they are advertising it?

More generally, no, you should go into debt and then incur a liability just to invest. You should first save the money, then consider carefully where to deploy that money, whether it means a new roof, car, computer, paying off debt, or investing and the like. Investing is a risky, long term venture that provides you monthly payment liability if you borrow to do it. Bad idea.


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## Oldroe (Sep 18, 2009)

I borrowed money 3 times using our payed off house. All were in market corrections and all moneys were payed off with in 6 months.

I don't think TD would have loaned us the money without a payed off house. As it was I negotiated better interest rates, made the bank pay the house assessment cost ($250) all in really shaky market conditions.

I wouldn't borrow in this market I'm just not confident in the market direction.

I've also used my credit card (instant interest) to get money earlier than my gic were coming due. It worked out well but I don't recommend it.


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## KrissyFair (Jul 8, 2013)

Causalien said:


> Sounds fishy. ... Line of credit are usually variable so when I hear a fixed 3% rate my spidey sense tingles.


Assuming OP got the same offer from TD that I did, it is technically prime + 2% but will a 12-month intro rate of 2.99% fixed.

@OP - it sounds like you've thought it out well. So now you just have to have a really firm assumption on that whatever you buy with it will go up in the near term.


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## uptoolate (Oct 9, 2011)

Definitely using someone else's money is a good way to get rich fast, unfortunately it's an even better way to get poor fast. I recall going to an IG seminar for fun sometime in 2007 where they were urging people to leverage the 'wasted' equity in their paid off houses because anyone could make much more money in the market than the low cost loan was going to cost. I wonder how that worked out for everyone. Well, actually I'm pretty sure how it worked out for the banks on those loans. Other than student loans and a mortgage which were paid off pretty quickly, never been a big fan of leverage but to each their own. Lots of money to be made... and lost!


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## Causalien (Apr 4, 2009)

uptoolate said:


> Definitely using someone else's money is a good way to get rich fast, unfortunately it's an even better way to get poor fast. I recall going to an IG seminar for fun sometime in 2007 where they were urging people to leverage the 'wasted' equity in their paid off houses because anyone could make much more money in the market than the low cost loan was going to cost. I wonder how that worked out for everyone. Well, actually I'm pretty sure how it worked out for the banks on those loans. Other than student loans and a mortgage which were paid off pretty quickly, never been a big fan of leverage but to each their own. Lots of money to be made... and lost!


Agree. Banks offer products because they are seeing the market going a certain way. You'll never see this in 2008 2009 for example. 2008 2009 were the years of 0% cash advance credit cards to lock in the higher interest rate that will be cAused by a mistake the end user will eventually make.

What this offer tells me is that they expect the interest rate to go up in 1 year.


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## the_apprentice (Jan 31, 2013)

Causalien said:


> What this offer tells me is that they expect the interest rate to go up in 1 year.


As for using Other People's Money to invest, I love that saying!

The keyword being "expect". I can't imagine the interest rate going down. What if it doesn't go up, instead it stays at 3%? Would you use leverage then if you could afford the interest payments?


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## Causalien (Apr 4, 2009)

Determination for leverage is based on my overall estimate of when the full cycle completes. It's a hit and miss art and I usually do it 1 year ahead of the predicted date cause it's leverage. I also watch out for exuberance by the banks. Indications of instances when they throw profit and margin of safety out in an attempt to outright grab market share at all cost.

Currently, there is a disconnect. between usa and cad cycle. since i am 90% in the us market, My exit point and my sentiments has nothing to do with the canadian cycle. The only thing I want is a Canadian housing crash so I can finally check off an item on my to buy list.


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## blin10 (Jun 27, 2011)

good strategy is to already have investments before borrowing... let's say you got $500 a month dividends coming in, then you borrow 20k and it's no problem, even if market sink good solid dividend payers will keep paying those divis.... i borrow all the time, but I do it when there's blood on the streets not when it's 52week high


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## liquidfinance (Jan 28, 2011)

james4beach said:


> The wording says that borrowed money has to be used to earn _income_, so dividends or interest income. Using leverage for a dividend strategy is clearly acceptable, but I'm not sure about a strategy that is meant to produce capital gains. Anyone know? Does any strategy using stocks qualify for this because, theoretically, stocks have the _potential_ to produce income?
> 
> http://www.advisor.ca/my-practice/i...nterest-deductibility-be-mindful-of-roc-99887


I'me sure the CRA actually has some examples of this. 

In that if there is a reasonable expectation for it to produce in come then you can claim the tax deduction on interest. However if the directors have stated a policy to never pay a dividend then you can not claim as you can not reasonably expect a future dividend to be paid. 

I will try and dig up the link apologies if people have posted already as I didn't read all the thread.


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## braintootired (Nov 4, 2013)

https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2

I want to make sure I understand the above correctly, that if I borrow (say) 10000 USD from IB, they are currently charging 1.59% per year in interest, right?


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## bgc_fan (Apr 5, 2009)

Isn't borrowing to invest the hallmark of real estate investing?


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## the_apprentice (Jan 31, 2013)

bgc_fan said:


> Isn't borrowing to invest the hallmark of real estate investing?


Yes, but people need a home. People don't NEED to invest money that isn't theirs.


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## none (Jan 15, 2013)

No they don't they can always rent.


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## bgc_fan (Apr 5, 2009)

the_apprentice said:


> Yes, but people need a home. People don't NEED to invest money that isn't theirs.


Note, I said real estate investing. Not buying a home to live in. I.e. Buying income property.


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## inverstmentmentjinja (Nov 25, 2013)

> Assuming OP got the same offer from TD that I did, it is technically prime + 2% but will a 12-month intro rate of 2.99% fixed.
> 
> @OP - it sounds like you've thought it out well. So now you just have to have a really firm assumption on that whatever you buy with it will go up in the near term.


So here is the catch , I didnt notice the fixed rate is only for 12-month, thank you for mentioning that(I just checked and it is fixed for one year ) , I was planning to invest them for more than 5 years . 
I think interest rate even if it go up will be very slow or else a housing crash will be ahead so I ll not cancel the idea completely.beside that National bank predict that interest rates will stay low for a many of years, new generations of Canadians are not rich as baby boomers was, few will afford to by house with high mortgage rates . 
the tax benefits is my other reason , I am employee and pay a huge tax so I can deduct the interest from my taxable income. 
For the guys who asked what kind of mutual funds I want to invest in , here is one of the candidates :
http://www.bmo.com/home/personal/ba...nd/price-and-performance?params=0&pch=mf02_en
this fund seem steady , even on crashes it hurt less than others . TD also have some steady growth funds , that I might consider them too.



> What this offer tells me is that they expect the interest rate to go up in 1 year.


Lets say the interest rate will go up , isn't that mean the economy is performing well , so my investment growth will go up too, It still worth it .


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## Causalien (Apr 4, 2009)

inverstmentmentjinja said:


> So here is the catch , I didnt notice the fixed rate is only for 12-month, thank you for mentioning that(I just checked and it is fixed for one year ) , I was planning to invest them for more than 5 years .
> I think interest rate even if it go up will be very slow or else a housing crash will be ahead so I ll not cancel the idea completely.beside that National bank predict that interest rates will stay low for a many of years, new generations of Canadians are not rich as baby boomers was, few will afford to by house with high mortgage rates .
> the tax benefits is my other reason , I am employee and pay a huge tax so I can deduct the interest from my taxable income.
> For the guys who asked what kind of mutual funds I want to invest in , here is one of the candidates :
> ...


The interest rate go up for several reasons. One of them is that the economy is performing well. The other reasons are and is not limited to:
-The economy is not doing well
-Forced rate hike due to USA rate hike (the worst case scenario)
-CDN Fed losing credibility

Actually, I think the interest rate lowering while the stock market is going up is a weird phenomena because bond price and stock are usually opposites of each other. Hence the 40% bond and 60% stock strategy for retired people.


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## Uranium101 (Nov 18, 2011)

inverstmentmentjinja said:


> So today I got offer of line of credit with fixed interest rate of 3% , and while the market is now growing , I thought in inversting in some safe portfolio that will give me around 7% annual growth , so I will earn 4% .
> does any body tried that ?


I have done it in the past. But that was back in 2011 when market was tanking. I borrowed at the rate of 0% to 3%. I have since paid back every penny this year.
With that being said, I will never pull that again in today's environment. The upside in stocks is now limited.
Funny thing is that, back then RBC Visa would give me 0% balance credit transfer for 1 year without balance transfer fee with stated interest rate of 0%. I don't even know what they are trying to do. Do they really want me to borrow that money and spend it all and hope that I can't pay it back after the period ends? The normal rate is 19.99%. Now they jacked up the balance transfer fee to 2% with 0% interest rate for 6 months.
Anyways, I would suggest you to pick a better time to leverage up. Now it's the time to de-leverage, not the other way around.


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## scomac (Aug 22, 2009)

the_apprentice said:


> Yes, but people need a home. People don't NEED to invest money that isn't theirs.


Sure you do if you're trying to build a business. Why is investing in the stock market (with borrowed money) really any different than that? If you have the cash flow to carry the debt, then, there isn't any fundamental reason not to do it. It's far more sensible than investing in over priced real estate to have a place to live, it's just that our society doesn't see it that way. If you lived in Europe or Asia, that perspective is different.


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## Spidey (May 11, 2009)

I use leverage but I usually employ it in markets where IMO the upside heavily outweighs the downside (ie. markets that have fallen quite a lot). In the current market I would say that the upside only slightly outweighs the downside and there are not a lot of bargains to be had.


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## avrex (Nov 14, 2010)

inverstmentmentjinja said:


> For the guys who asked what kind of mutual funds I want to invest in , here is one of the candidates :
> http://www.bmo.com/home/personal/ba...nd/price-and-performance?params=0&pch=mf02_en.


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## andrewf (Mar 1, 2010)

Hilarious. Leveraging up to buy high fee MFs is a good way to enrich banks.


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

^ Agreed. OP doesn't see that and mind seems to be made up. Wasting money in fees, liability and interest to save a few pennies in tax. Sad that our financial literacy is so poor that it leads some to believe this is good for them. I guess they'll have to live and learn.


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## GoldStone (Mar 6, 2011)

andrewf said:


> Hilarious. Leveraging up to buy high fee MFs is a good way to enrich banks.


Hilarious indeed. I should buy myself more bank shares. :biggrin:

To OP:

You want to leverage a high-fee mutual fund? This tells me that your investment knowledge is not up to snuff (no offense). Slow down and learn.

Leverage *may* kill you. High fees *will* kill you. You want to combine the two? What a bad idea.


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## marina628 (Dec 14, 2010)

My niece was talked into borrowing $45,000 to max her RSP ,she did this despite needing 5 years to pay it all off and she bought all Mutual Funds.I did this in past but as one poster pointed out we had no issues carrying the debt and there were so many advantages at that time.


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## andrewf (Mar 1, 2010)

^That's disgusting. I wonder how the dirtbags who do that to people can live with themselves.


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## Causalien (Apr 4, 2009)

andrewf said:


> ^That's disgusting. I wonder how the dirtbags who do that to people can live with themselves.


OP, if you have a house. Get a Heloc then lock 20k of it into fixed rate mortgage. Yhis is a lot better than your current deal.

Also, don't investthatin mutual fund. Buy bank preferred instead if you are that trusting of banks.


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## inverstmentmentjinja (Nov 25, 2013)

> You want to leverage a high-fee mutual fund?


I know their fees is high , but the return was 9.08 (average 5 % over years ) this year and already subtract the management fees, I already had 5000 in that fund and it gained to 5500 then I sold it to more aggressive fund . for some one like me who dont have a lot of money it is hard to have a devirsed portfolio without the help of mutual funds. 

Do you have any better investment that give me a better return for the same risk level ? I personally couldn't fund some thing better than mutual funds , there are some ETFs there , but most of them their risk is above average. 



> OP, if you have a house. Get a Heloc then lock 20k of it into fixed rate mortgage. This is a lot better than your current deal.


Did I miss some thing ? can you show me in numbers how I am wrong if you invest it for 5 years ?


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## bgc_fan (Apr 5, 2009)

inverstmentmentjinja said:


> I know their fees is high , but the return was 9.08 (average 5 % over years ) this year and already subtract the management fees, I already had 5000 in that fund and it gained to 5500 then I sold it to more aggressive fund . for some one like me who dont have a lot of money it is hard to have a devirsed portfolio without the help of mutual funds.
> 
> Do you have any better investment that give me a better return for the same risk level ? I personally couldn't fund some thing better than mutual funds , there are some ETFs there , but most of them their risk is above average.
> 
> ...


I think what most people are getting at is that you may have missed the fine print about past performance does not guarantee future performance. They are also pointing out that with a high MER, you'll need to guarantee higher returns in a market environment that may not have that much upside.

Let's put it this way, given the loan rate and MER, you need an investment that pays out at least 5%, not too mention the related taxes to break even. Then in the next year, you're looking at an even higher rate due to the reset rate.


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## andrewf (Mar 1, 2010)

inverstmentmentjinja said:


> for some one like me who dont have a lot of money it is hard to have a devirsed portfolio without the help of mutual funds.


If you don't have a lot of money, can you afford to lose this money and wind up with more debt than equity? Would you be able to repay the loan if your bank called your HELOC? LOCs are demand loans.


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## inverstmentmentjinja (Nov 25, 2013)

andrewf said:


> If you don't have a lot of money, can you afford to lose this money and wind up with more debt than equity? Would you be able to repay the loan if your bank called your HELOC? LOCs are demand loans.


Yes, I will only borrow up to the amount that I can pay 50% of it in case any sharp down happened to the market , Actually I ll sit with the Bank clerk to verify the terms and conditions . but thank you for that notice. 



> given the loan rate and MER, you need an investment that pays out at least 5%


the Rate listed by BMO are already subtracted the MER fees , but you are right , 5% will be on edge. 





> OP doesn't see that and mind seems to be made up. Wasting money in fees, liability and interest to save a few pennies in tax. Sad that our financial literacy is so poor that it leads some to believe this is good for them


I appreciate all the people warned me in this thread , that is why I am post this thread , I want some input from others , and sure there are a long trip for me to learn .

Overall I am seeing many positive experience from people here who did that or knew some body who did it . I think I just need to make my calculations , and pick the right investment , and while it is the first time may be I have to reduce the amount of loan.


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## Causalien (Apr 4, 2009)

inverstmentmentjinja said:


> I know their fees is high , but the return was 9.08 (average 5 % over years ) this year and already subtract the management fees, I already had 5000 in that fund and it gained to 5500 then I sold it to more aggressive fund . for some one like me who dont have a lot of money it is hard to have a devirsed portfolio without the help of mutual funds.
> 
> Do you have any better investment that give me a better return for the same risk level ? I personally couldn't fund some thing better than mutual funds , there are some ETFs there , but most of them their risk is above average.
> 
> ...


Yep you missed something.
Your current deal is 3% fixed for 12 month and prime + 1% variable rate afterwards.

A HELOC locked into fixed mortgage rate right now is prime + 1%. At current rate, you get a fixed 4% per year for the next 5 years. (Better if you can lock in more than 5 years, which is what I did. 10 years, though I am not sure if HELOC locked mortgage is the same as a traditional mortgage where the term is legally required to be renewed every 5 years). At best, your scheme gives you a 3% for 1 year and maybe 4% for the 4 years after. So my scheme, you are paying 1% to insure that your rate doesn't go up for the 5 years of your investing period. This is basic risk free reward calculation on borrowing.

The risk of prime rate going up is very high at the moment. US fed taper is happening as we speak. FOMC meets about 8 times a year, assuming that they plan on reducing $10B per meeting, it means that they plan on tapering to $0 QE by the end of 2014. 2015 is when we see interest rate actually rising i.e. the rate that affects prime. So by this risk reward analysis, it is best to lock in a 5 year fixed rate than a variable rate if you plan on doing rate arbitrage for 5 years.

So the above is the analysis on the borrowing side which you probably have not done yet. Below is the analysis on the buying side. Let me destroy it for you.

I haven't read too much into the mutual fund past performance that you provided but 8.9% frankly laughable. The S&P did ~27% increase while the TSX did ~8.5%. Your fund did 8.9%... asset wise. Did the nice mutual fund guy told you the performance is asset wise? Unit wise, if you go back to 2007, the unit still cost $18 which is the same cost as today at $18. Which means that the asset growth has been due to dilution of issued unit due to increased investment from retail investors. 

All the technical jargon aside, if there's one thing that you get out of this is this (and let's use their own graph). Dec 2007, the fund's asset is valued at $40,000 based on their graph. Today it is valued at $47,000. That's only a 17.5% increase over the last 6 years. That's a mere 2.7% per year growth. It is just a fund that tracks the index funds and took 2% from you. SPY that tracks US S&P, in the same period, gained 20%. 

Listen to the others. Do the couch potato and don't let your 2% ripped off from you. 

Your mind is already made up so I'll just say this with the hope that it'll sink in a bit later to help you. A decades ago, I'd think like you and without the benefit of the Internet to help me sort through my strategies. Here are the wisdoms that is imparted through this whole thread. 
-You are borrowing too much vs your disposable cash according to the few financial tidbit you've disclosed. 
-10% is not guaranteed return. I'd say, in my experience, mutual funds does 10% return rarely and this is probably going to be the best annual return for this mutual fund for a while. 
-2% MER is too high.


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## GoldStone (Mar 6, 2011)

Here's another angle.

BMO Asset Allocation is a balanced fund. 32% of the fund is allocated to bonds. Bonds are expected to return 2.5%-2.75% before fees and inflation. Subtract 2.11% MER and 2% inflation. You end up with a guaranteed negative return of 1.6%-1.4% on 32% of your invested money.

If you borrow, 32% of the borrowed amount will earn a guaranteed negative rate of return. This doesn't make any sense.


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## houska (Feb 6, 2010)

Borrowing to invest is feasible and even reasonable in the right circumstances and with the right mentality. We have had a mortgage we don't need since purchasing our current house in 2007 in order to do leveraged investing. However, 2 important things

a) It is a battle of inches. You can't count on a 10% return. Maybe 7-8% return *over the long term* these days. And that assumes you make sure your investment costs (MERs, advisory fees, etc) are minimal, i.e. well under 1%, not a 2%+ MER. We locked in a below 3% mortgage rate (and in the previous 5 year term were at P-0.9 or so), so even this is an attractive spread but be aware.

b) You need to make sure you have the personal risk tolerance. In 2008-09 we were underwater on our leveraged portfolio. We were OK with that, did not lose sleep, and weren't tempted to pull our money out. Our cash flow situation was such that even if we lost 30-50% we could (unhappily of course) pay the loan back from savings in the interim, i.e. we were borrowing to get ahead of our savings by a few years, not to swing for the fences. Sometime in 2011 we broke even again and since then we've been making money. We were mentally prepared for such an eventuality. However, if watching the markets gyrate in 2008-09 would have given us ulcers how to pay back the loan, it would not have been the right thing to do. And you need a long-term view, multiple years.

BTW, in terms of the CRA requirement mentioned above, I believe it has not been fully tested in the courts, but that the accepted information is that the investments you make must be *potentially able* to generate investment or dividend income. However stocks are fine even if they don't actually pay dividends since they *could*. BTW, you need to do your paperwork and paper trail on the money very carefully. I've gleaned this from the various Smith Manoeuvre threads.


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## GoldStone (Mar 6, 2011)

GoldStone said:


> Here's another angle.
> 
> BMO Asset Allocation is a balanced fund. 32% of the fund is allocated to bonds. Bonds are expected to return 2.5%-2.75% before fees and inflation. Subtract 2.11% MER and 2% inflation. You end up with a guaranteed negative return of 1.6%-1.4% on 32% of your invested money.
> 
> If you borrow, 32% of the borrowed amount will earn a guaranteed negative rate of return. This doesn't make any sense.


To put this another way:

A bond is a loan you give to someone else. It doesn't make any sense to borrow money to lend money. As a small individual investor, you will always have a negative spread (even before fees).

Therefore, you should change your asset allocation to 100% equities before you start borrowing. Not comfortable with 100% equities? Forget about borrowing to invest.


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## My Own Advisor (Sep 24, 2012)

+10 Goldstone regarding borrowing to invest rules of thumb.


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## inverstmentmentjinja (Nov 25, 2013)

@Causalien: thanks, I think I should add more overhead to my numbers to have more realistic view , 



> Therefore, you should change your asset allocation to 100% equities before you start borrowing. Not comfortable with 100% equities? Forget about borrowing to invest.


yeah , I intentionally looked for mix ,because I am also looking for safe investment , but your point is valid too . 

@houska: your timing is the worst time that any body can make an inverstment , but it seem you survived and start profiting , I have to make sure I ll survive too if that happened to me. I am waiting to see if companies really making profit or the stock price just increasing because people want to invest in stock or else a correction will be a head


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## Rusty O'Toole (Feb 1, 2012)

Jumping into the market when it is making all time highs is a dangerous strategy. Using borrowed money makes it worse. Especially when we are 5 years into a bull market without a major correction.


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## andrewf (Mar 1, 2010)

Great advice Goldstone, and very concisely put. 

I would suggest OP put a fork in this plan for six months while they do some more research. I don't think they're ready yet. And the deal the bank is offering is not exceptional, so don't use that as a reason to act quickly.


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## inverstmentmentjinja (Nov 25, 2013)

> Jumping into the market when it is making all time highs is a dangerous strategy


Then how can I make use from current bull market, I feel bad every time see indexes gaining these highs and I am doing nothing.do I have just to wait for a crash ? I am sure at that bad days when every one will be broke ,I ll not dare to invest my money in the market.


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## yupislyr (Nov 16, 2009)

james4beach said:


> The wording says that borrowed money has to be used to earn _income_, so dividends or interest income. Using leverage for a dividend strategy is clearly acceptable, but I'm not sure about a strategy that is meant to produce capital gains. Anyone know? Does any strategy using stocks qualify for this because, theoretically, stocks have the _potential_ to produce income?
> 
> http://www.advisor.ca/my-practice/i...nterest-deductibility-be-mindful-of-roc-99887


There was a recent tax court ruling where interest expense was denied because the stock used had no history of paying dividends. The stock was in a privately held company though, along with some other wrinkles.

http://decision.tcc-cci.gc.ca/site/tcc-cci/decisions/en/item/31114/index.do


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## nobleea (Oct 11, 2013)

yupislyr said:


> There was a recent tax court ruling where interest expense was denied because the stock used had no history of paying dividends. The stock was in a privately held company though, along with some other wrinkles.
> 
> http://decision.tcc-cci.gc.ca/site/tcc-cci/decisions/en/item/31114/index.do


That really doesn't apply to publicly traded companies. To do so would be a major upheaval in Canadian investing/tax strategies. Bigger than the income trust changes.

Not only is interest tax deductible on stocks that don't currently pay dividends, but *could* at some point in the future, but interest on interest is also tax deductible. That is, if you owe $2K in interest on an investment loan in a year, you can reborrow the 2K, pay the interest, and the interest on the new 2K loan is also tax deductible. This is called capitalizing the interest.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> The wording says that borrowed money has to be used to earn _income_, so dividends or interest income. Using leverage for a dividend strategy is clearly acceptable, but I'm not sure about a strategy that is meant to produce capital gains.
> 
> Anyone know? Does any strategy using stocks qualify for this because, theoretically, stocks have the _potential_ to produce income? ...


There was a CRA Interpretation bulletin that explicitly said that dividend income was required but that stocks that did not pay dividends would "generally" be acceptable as long as there was a possibility of paying dividends in the future. Where the bulletin said a non-dividend stock would definitely not be allowed was where the company in question had a policy against paying dividends.


Companies such as Microsoft and Stantec are examples where non-dividend paying companies later switched.


Cheers


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## Canadian (Sep 19, 2013)

james4beach said:


> The wording says that borrowed money has to be used to earn income, so dividends or interest income. Using leverage for a dividend strategy is clearly acceptable, but I'm not sure about a strategy that is meant to produce capital gains. Anyone know? Does any strategy using stocks qualify for this because, theoretically, stocks have the potential to produce income?


The interest charged on the loan can only be deducted from the investment income [i.e., dividends, interest]. Deductions against capital gains are strictly prohibited:



> most interest you pay on money you borrow for investment purposes, but generally only if you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid
> 
> Source:http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html


If you pursued a capital gains strategy and dividends/interest happened to be a bi-product, then interest can be deducted from the distributions. If you paid, for example, $500 in interest on the investment loan during the year but your investments only produced $300 in non-capital-gain income, your interest deductions cannot exceed $300. The CRA's finance department prohibits interest deductions to create a loss position for investment [property] income, as it could be netted against employment and business income.


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## nobleea (Oct 11, 2013)

Canadian said:


> The CRA's finance department prohibits interest deductions to create a loss position for investment [property] income, as it could be netted against employment and business income.


I believe you misunderstood the statement. It was Gov't of Canada's Finance department that stipulated investment income must exceed interest. Not the CRA. CRA does not listen to Finance and is ok with interest exceeding investment income. They fall under different ministries.
If you have only capital gains, your investment loan may still be deductible. AS LONG AS the securities you have invested in have not specifically said they are prohibited from paying dividends. Most non dividend paying stocks do not stipulate that, so there is a possibility that they may pay it in the future. If you didn't have ANY capital gains or dividend income for many years, that might raise eyebrows eventually. Though no one, investing in normal public securities, has ever mentioned this to be an issue.

The interest deduction goes against your employment income and your marginal tax rate. Where as the dividend income (and capital gains) are taxed more favourably. It is not a zero sum game as far as taxes go.


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## Eclectic12 (Oct 20, 2010)

Canadian said:


> The interest charged on the loan can only be deducted from the investment income [i.e., dividends, interest]. Deductions against capital gains are strictly prohibited ... If you pursued a capital gains strategy and dividends/interest happened to be a bi-product, then interest can be deducted from the distributions ...


The way I read IT-533 Interest Destructibility and Related Issues, the full $500 would be fine.
http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.html

As well, in the "Borrowing for investments including common shares" section, example #9 gives a fictional company S corp that:


> ... discloses to shareholders that dividends will only be paid when operational circumstances permit (i.e., when cash flow exceeds requirements) or when it believes that shareholders could make better use of the cash.


With what you've written (and the way I'm interpreting it), there's no income (dividend or otherwise) and only capital appreciation so the interest won't be deductible. The bulletin on the other hand, says:


> ... In this situation, the purpose of earning income test will generally be met and any interest on borrowed money to acquired S Corp. shares would be deductible.


So unless there's another bulletin or legislation that changes this, capital gains plus dividends should be fine.




Canadian said:


> ... If you paid, for example, $500 in interest on the investment loan during the year but your investments only produced $300 in non-capital-gain income, your interest deductions cannot exceed $300 ...


 ... of course there's also the practical side ... if the taxpayer is reporting employment income of $60K, investment income of $300 with an interest deduction of $500 - unless there's some other issue, I suspect they've got bigger fish to fry that would be much more rewarding.


Cheers

*P.S.*

... of course I'm much happier to my dividend/cash distributions significantly exceed my interest costs.


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## Dave (Apr 5, 2009)

Rusty O'Toole said:


> Jumping into the market when it is making all time highs is a dangerous strategy. Using borrowed money makes it worse. Especially when we are 5 years into a bull market without a major correction.


I agree 100% with the above. Bad idea.

Dave


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## andrewf (Mar 1, 2010)

Apparently, new highs are correlated with further rises. This is the momentum effect.


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## Taraz (Nov 24, 2013)

KrissyFair said:


> It's not a totally crazy idea in and of itself when the interest rate is that low, but you need to be risk tolerant and have enough other assets that you can repay the loan even if this portfolio tanks.


If you have money to pay it off, why not just invest your money and save the interest?


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## richard (Jun 20, 2013)

andrewf said:


> Apparently, new highs are correlated with further rises. This is the momentum effect.


If the market reaches a new high because of improvements in the fundamentals there's no reason it can't go higher. Both fundamentals and prices frequently have trends that last for some time. Buying into an overpriced market is dangerous but you don't know that if you know only the price and not the value.

If you've locked in a mortgage/HELOC at 3%, you use it only for investment purposes so it's tax deductible, and you can buy the Canadian index to get a dividend yield of around 3% (never mind the additional retained earnings and dividend growth)... well you'll have to make your own judgement on that. Of course it all depends on what backup plans you have in case things don't go well.


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## Canadian (Sep 19, 2013)

With high markets and the threat of increasing interest rates, I consider now to be the optimal time to pay down debt, even if it only carries a small interest rate. I know the market isn't exactly "hot" right now [as in pre-crash euphoria] and there are many undervalued stocks out there. When it comes to leveraging a portfolio, though, I would prefer to do it after the market has been down, not after a year of solid gains like 2013 experienced [looking at the TSE and S&P500]. If one has no debt, then great! - I suggest one keeps it that way.


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## cannadian (Dec 30, 2011)

Canadian said:


> With high markets and the threat of increasing interest rates, I consider now to be the optimal time to pay down debt, even if it only carries a small interest rate. I know the market isn't exactly "hot" right now [as in pre-crash euphoria] and there are many undervalued stocks out there. When it comes to leveraging a portfolio, though, I would prefer to do it after the market has been down, not after a year of solid gains like 2013 experienced [looking at the TSE and S&P500]. If one has no debt, then great! - I suggest one keeps it that way.


I agree. If there's ever a time to increase leverage it would be when markets are low - not when they are high.

As Buffett says though - if you're smart, you don't need leverage. And if you're dumb... You should probably not be using it to begin with..


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## richard (Jun 20, 2013)

Canadian said:


> With high markets and the threat of increasing interest rates, I consider now to be the optimal time to pay down debt, even if it only carries a small interest rate. I know the market isn't exactly "hot" right now [as in pre-crash euphoria] and there are many undervalued stocks out there. When it comes to leveraging a portfolio, though, I would prefer to do it after the market has been down, not after a year of solid gains like 2013 experienced [looking at the TSE and S&P500]. If one has no debt, then great! - I suggest one keeps it that way.


I'm adding a bit right now, mainly to balance a reduction of leverage in an unrelated area. The net result is that I'll have a lot less leverage, slightly higher interest rates, and the portfolio will be appreciably larger. If we should be so lucky as to see another 2009 soon, I'm getting out the elephant gun and going hunting 

Of course anyone who doesn't have a net worth a lot higher than the amount they are considering borrowing would be better off burning the bank flyer to save $0.05 in heating costs rather than actually taking an offer for added leverage.


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