Borrowing to buy investments can be an effective way to boost your potential returns. This is called using leverage Leverage A way to make a larger investment by using borrowed money to invest. The more you invest, the more money you can make.
As long as your investment Investment An item of value you buy to get income or to grow in value. But taking on debt Debt Money that you have borrowed.
You must repay the loan, with interest, by a set date. You may be able to get a loan or line of credit from your financial institution. The interest rate Interest rate A fee you pay to borrow money. Or, a fee you get to lend it. If you get a loan, you pay interest. If you buy a GIC, the bank pays you interest.
It uses your money until you need it back. You can refinance your mortgage Mortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.
The hope is that the investment will not only cover the loan and related borrowing costs, but also generate extra income. The downside is that you could be putting your equity Equity Two meanings: The part of investment you have paid for in cash. Investments in the stock market. When you buy on margin , you borrow money from your investment firm to pay for part of your investments. Margin Margin A way to buy investments by borrowing money from a stockbroker. You must also invest some of your own money first.
The extra that you borrow is your margin. Some rules apply about the size of margin that you can have. When you short sell a stock Stock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.
But if the stock price rises, you could lose more money than you originally invested. Whether your investment makes money or not, you still have to pay back the loan plus interest. If you rely solely on investment returns to cover your borrowing costs and your investment falls in value, you could end up defaulting on the loan.
If you put up your home, or other investments, as collateral for the loan, you could lose them as well. Interest you pay on money you borrow to invest in an RRSP is not deductible. It can add up and offset the initial benefit of making the contribution. Learn more about borrowing to invest in your RRSP. Taking on this kind of debt can be very risky. Use this calculator to see how long it will take you to pay down debt at different interest rates.
Take out a loan or line of credit You may be able to get a loan or line of credit from your financial institution. You agree to pay back the full amount, plus interest, by a set date. Also, the period of time that an investment pays a set rate of interest. Borrow against your home equity You can refinance your mortgage Mortgage A loan that you get to pay for a home or other property. Buy on margin When you buy on margin , you borrow money from your investment firm to pay for part of your investments.
Short sell stocks When you short sell a stock Stock An investment that gives you part ownership or shares in a company. Warning Whether your investment makes money or not, you still have to pay back the loan plus interest. The higher the rate, the more it will cost you to borrow. Your level of debt — Do you have other high-interest debt? Learn more about managing debt Paying back the loan — Can you afford to make the loan payments on time, and pay back the loan quickly?
Can you afford to lose the collateral you put up for the loan? Any asset used as collateral, including your home, can be taken by the creditor to satisfy the loan. How will you pay for the loan if your investments fall in value? Do you have a secure salary, a cash reserve or other sources of income? What are the terms for repaying the loan and interest?
Are there any other fees associated with the loan? How much will you have to pay in commissions and fees? What are the tax consequences? Depending on what you invest in, you may be able to deduct the interest on money you borrow to invest. Thinking about borrowing to make an RRSP contribution? Take action Use this calculator to see how long it will take you to pay down debt at different interest rates. You may also like… Home equity as a source of retirement income survey Short selling Buying on margin How to buy and sell stocks Stocks.
Last updated June 19, Share on Facebook Share on Twitter. Share by Email Print Article Share on social.More...