Investments / Investment Leveraging
Investment Leveraging: Borrow to Invest, With a Plan
An investment loan gives you a larger amount to invest today instead of saving a little at a time. Used carefully, it can speed up your wealth building, and the interest may be tax-deductible.
Leveraging means borrowing money to invest. Because the full amount is invested from day one, it has more time to grow. It also increases risk: if the investments fall in value, you still owe the full loan. That is why leveraging only makes sense with a clear plan, a long time horizon and steady income.
How it works
Borrow
Take an investment loan, often starting from $25,000, or use a line of credit.
Invest
The money is invested, often in segregated funds that offer guarantees.
Pay the interest
Many loans allow monthly interest-only payments.
Deduct and grow
Interest on money borrowed to earn investment income is generally tax-deductible.
A simple example
Say you borrow $100,000 at 6% interest and you are in a 40% tax bracket. The interest is $6,000 a year, or about $3,600 after the tax deduction. If the investments earn 8% in a year, that is $8,000 of growth on money you did not have to save first. If they lose 8%, the loss is magnified in the same way.
This example is for illustration only and does not reflect any specific product, rate or return.
Why segregated funds?
Principal guarantees
Segregated funds guarantee 75% to 100% of your deposits at maturity or death, which reduces the downside.
Bypass probate
With a named beneficiary, the money is paid directly to your family, privately and quickly.
Potential creditor protection
Naming a family member as beneficiary may protect the investment from creditors, which appeals to business owners.
Resets
Some funds let you lock in market gains, raising your guaranteed amount.
Is leveraging right for you?
May be a good fit if you
- Have stable income and an emergency fund
- Plan to invest for 10 years or more
- Are comfortable with market ups and downs
- Are in a higher tax bracket
Probably not right if you
- Have high-interest debt to pay off first
- Need the money in the next few years
- Would lose sleep over a falling market
- Have an uncertain income
Frequently asked questions
Is the interest really tax-deductible?
Interest on money borrowed to earn income from non-registered investments is generally deductible. It is not deductible when you borrow to invest in a TFSA or RRSP. Your accountant can confirm how it applies to you.
What if the market drops?
You still owe the full loan, and if the loan has margin requirements you may need to add money. A long time horizon and guaranteed segregated funds help reduce this risk.
Can I use my home equity?
Yes. A home equity line of credit often has a lower interest rate, but your home secures the loan, so it must be planned carefully.
Borrowing to invest increases both potential gains and potential losses. Read the product documents and get professional advice before you borrow to invest.
Talk to Devendra Kumar, Financial Planner (CLU, CHS)
DK Insurance & Investments Inc. serves families across the GTA from offices in Vaughan, Mississauga and Brampton. Call or text +1-647-761-0517 for a free, no-obligation conversation.