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Topic: How To Invest

Is borrowing money to invest a good idea?

borrowing-money-to-invest

Is borrowing money to invest right for you? The risks may not be worth the reward.

With interest rates still near historic lows, borrowing money to invest continues to look attractive. That’s especially true if you borrow to buy some of the best Canadian dividend stocks, or ETFs that invest in these stocks.

As a general rule, you should be borrowing money to invest in stocks after a drop, rather than when the market has steadily risen for several years. We think you’ll benefit most from this buying opportunity by sticking with the kind of stocks we recommend, as well as the ETFs we recommend in Canadian Wealth Advisor.


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Dividend-paying stocks or ETFs that invest in high-quality, dividend-paying stocks will give you regular dividend income and cash flow to pay the interest on your investment loan. They’ll also benefit most from a stock market rebound.

Today, you can borrow at a low percentage rate if you use your home as collateral. Over long periods, the total return on well-diversified, high-quality stocks and ETFs runs between 10% and 11%. So, in addition to the tax advantages, you can expect to earn more than your borrowing cost.

But borrowing to invest is not without risks, including the risk of increasing your leverage. The amount you owe on your investment loan will stay the same, regardless of what the market does, but every dollar your portfolio gains or loses will come out of your equity. In addition, if you take out a variable rate loan, the interest rate you pay could eventually rise above the return on the fund.

On the other hand, borrowing to invest can be a highly effective tax shelter. You deduct your interest expense against your current income. But the investment income you earn comes with three key tax advantages: you get the dividend tax credit on qualified Canadian stocks and you only pay income tax on half of your capital gains. In addition, you are only liable for capital gains when you sell; if you buy high-quality investments, you’ll wind up holding some of them for as long as you live. It’s a great tax-deferral technique. And it’s perfectly legal.

Still, borrowing to invest only makes sense if all five of the following apply: you are in the top income-tax bracket; your income is secure; you have 10 or more years until retirement; you follow our low-risk investment approach; and you have the kind of temperament to sit through the inevitable market setbacks without losing confidence at a market bottom and selling out to repay your loan.

We also feel most investors should make their maximum RRSP contributions before borrowing to invest. You’ll get a tax deduction for your RRSP contribution, and RRSPs shield all of your investment income from tax, not just capital gains.

Six ways to tell if borrowing to invest is right for you

Borrowing to invest only makes sense if all six of the following apply:

  • You are in the top income-tax bracket and expect to stay there for a number of years;
  • Your income is secure;
  • You have 10 or more years until retirement;
  • You follow our low-risk investment approach;
  • You have the kind of temperament to sit through the inevitable market setbacks without losing confidence at a market bottom and selling out to repay your loan;
  • You have already made your maximum RRSP contributions.

Do you believe borrowing to invest only makes sense if an exceptional investment opportunity arises? Or do you believe it can be used routinely by prudent investors who understand the risks? Or do you avoid it altogether? Let us know what you think.

This article was initially published in 2009 and is regularly updated.

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