You are investing to get a better return on your savings. Better than a mutual fund or a simple savings account. So you are thinking – if I borrow to add to my investment accounts – I will be better off in the long run. I’ll pay off the loan over time and take a long-term view of the return on a larger capital. NOTE: These thoughts are my thoughts, and not investment advice. Everyone’s situation is different. Only you can analyze and decide what’s best for you. If you do have an adviser – ask. Shop for an investment loan
Simple math will validate this thought. If you manage to invest and make say 6% compounded return – and y
ou can borrow at 3% – you will make another 3% on your investments until the loan is paid for – and then the full 6% of the previously borrowed amount. Sounds good to me! Even better – if you manage (and trade) your own portfolio and make in excess of the average 6% – the spread becomes attractive. IF you can keep up the higher rate of your trading. Then it becomes a business of sorts, and it makes sense to borrow to invest in your business.
However – there are some challenges to consider. Yes, interest rates are now low. If you have a fixed loan or line of credit at at least half of your average return on your investments – good idea. Anything higher that, not so much. Here are a few BUTs:
- If the markets are growing and a 6% return seems easy – this becomes very attractive. But you guessed it – if your investments should dump… you will be stuck with the loan (unless it is paid off).
- If your loan interest rate is variable, you run a risk of paying more interest and if the stock market should go down you have a double hit on your net return.
- If you borrow on top of other loans, you risk running out of payment money. This, in my opinion works best if you borrow safely – and should you lose the funds you can recover. Never borrow in desperation to earn more on your investments.
Where to borrow to invest?
- If you are with a stock broker you can ask for a margin account. Then you can buy more stocks using the broker’s money. Often you will get a 30% or more of the market value of the investments. So you can buy $10,000 worth of stock for $7,000 of your own funds.
- You can borrow from your own RSSP to invest outside the RSSP.
- Mortgage/line of credit against your house. These loans often come at a very favourable interest rate.
- Shop for a lender. Companies like LoanConnect will shop for the best rates and terms and present your application to the preferred lender.
