Borrowing to Invest

Leveraged investing1 is defined as borrowing money to finance an investment

You are familiar with the concept of leverage if you’ve ever:

Both individuals and companies use leverage as an investment strategy; a company with a lot of debt is considered highly leveraged.

Leverage can be an effective way to boost returns in your investment portfolio, but you should also understand the potential consequences of borrowing to invest.

Leverage magnifies your losses as well as your gains, and you must be able to withstand those losses if you are going to use borrowed money to invest. The leveraged investment should be suitable to your investment goals and objectives and consistent with the “Know Your Client” information that you have provided to your advisor.

It is both your responsibility and your advisor’s to ensure that you understand the investment, and are comfortable with the risk level.

 

Risk of Borrowing to Invest

Here are some risks and factors that you should consider before borrowing to invest:

Is it Right for You?

Borrowing money to invest is risky. You should only consider borrowing to invest if:

You should not borrow to invest if:

You Can End Up Losing Money

Tax Considerations

Interest Deductibility

When you borrow funds to purchase non-registered investments, the interest is only tax deductible as long as you continue to hold the investment or any substituted investment.

There are special exceptions to the rules related to tax deductions on interest costs designed to provide relief to investors who have borrowed money to buy investments that have since declined in value. 

This allows you to continue to deduct the interest expense on the loaned funds after the sale of the investment subject to certain restrictions, illustrated by the following:

These rules do not apply to investments in real or depreciable property.

Borrowing To Invest – This is disclaimer text for SF Account distinction.advisornet.org

HOW WE HELP

Without barely a moment’s thought, you would…

Do you ever feel like life is too automated?  Maybe…

You have worked all your life and saved for…

After years of living the “rat race”, you are looking…

First you were putting on their diapers. Then you…

SERVICES

Many people will offer you advice on which investments…

For most Canadians, retirement is a major financial goal that…

Many people assume that estate planning is only for the…

Investment tax planning is not just about writing the…

Careful portfolio analysis is necessary to ensure that…

Proper analysis is vital to ensure that you aren’t paying too…