Information About Investment Loans

There are a lot of myths surrounding investment loans. Here are some considerations people often overlook.

Borrowing to invest could be smarter than borrowing to spend.

Seems like a no-brainer, right? Yet every day, consumers apply for loans to purchase consumer goods such as furniture, electronics and automobiles, when they could be using their borrowing power to buy investments that have the potential of increasing their wealth. When you consider low interest rates, interest deductibility and growth potential, it’s clear that borrowing to invest could be smarter than borrowing to spend.

$50,000 mutual funds	Purchase from borrowed money	$50,000 consumer goods
4%¹	Interest rate / cost of borrowing	6% - 28%
100% ²	Interest deductibility	0%
Yes	Growth potential	No

¹ Average figures; for illustration purposes only. 2. Generally speaking, interest paid to borrow money to earn investment income is tax deductible. When the interest is deducted, it can be an effective way of reducing the overall cost of an investment loan. Interest is not deductible in all circumstances. For example, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid. Additional restrictions apply for residents of Quebec. Please consult with a tax specialist for information on deducting interest.

Borrowing to invest with a no margin call option can protect you against having to sell your investment at a potential loss.

In the scenario below, a drop in the market of 17% may result in a margin call. You would have to either: sell the investment at a loss, pay down the loan using your own funds, or provide more mutual/segregated funds as collateral. None of these options is ideal. A no margin call option on an investment loan avoids this scenario, and allows you to stay invested.

Based on a 100% Loan:

When you choose a no margin call option on your loan, you're in control over when to sell your investment. And, of course, your advisor can help you.

Interest on an investment loan may be tax deductible.³

It’s possible to claim interest paid on money borrowed for investment purposes – as long as there is potential to earn investment income such as interest and/or dividends. Of course, there are certain limitations to this rule, which is why you should always consult with a tax specialist on this matter.

For example:

Joe is an Ontario resident who makes an annual salary of $60,000, his marginal tax rate is 31.15%. Without any deductions, his tax payable amount is $12,292. If Joe takes out a $50,000 interest-only investment loan at 4.00% interest, he can potentially deduct $2,000 (the annual cost of the loan) from his income, which decreases his tax payable amount to $11,669, saving him $623. This savings also reduces his overall cost of borrowing, from $2,000 to $1,377.*

* For illustration purposes only.

³Generally speaking, interest paid to borrow money to earn investment income is tax deductible. When the interest is deducted, it can be an effective way of reducing the overall cost of an investment loan. Interest is not deductible in all circumstances. For example, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid. Additional restrictions apply for residents of Quebec. Please consult with a tax specialist for information on deducting interest.

Borrowing to invest could promote fiscally responsible behaviours.

Traditionally, the act of saving involves setting aside money to invest on a regular basis. But, at a time when Canadians are increasingly faced with the choice between paying a debt or proactively saving each month, many forgo investing to pay their debt. The discipline of paying a debt can actually work in your favour if you qualify for an investment loan. How? An investment loan allows you to purchase a larger investment upfront, and then you have the option to either repay the loan gradually by way of a monthly principal plus interest loan payment, or you can simply make interest-only payments until you’re ready to pay off the loan.

Factor the new investment loan payment into your budget. If you can afford the payment, a loan might help you achieve your financial goals faster.

Borrowing to invest could be effective for a wide variety of investors.

What is the profile of an ideal investment loan candidate? Many assume that borrowing to invest is only for high net worth investors, but in fact, it’s open to all who are interested in the opportunity to potentially increase their wealth – and, of course, to all who qualify.

Speak with your advisor so that they can help determine your financial objectives, risk tolerance, cash flow and investment horizon. You may find that borrowing to invest can be an effective strategy for you.

Leveraging involves greater risk than purchasing investments using only your own cash resources because it has the potential to magnify investment losses.

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Contact your financial advisor today to see if an investment loan is right for you.

B2B Bank does not provide investment advice to individuals or advisors and does not endorse or promote any investment products. While investment loans have the ability to magnify gains, they also have the potential to magnify market losses. Leveraging involves greater risk than purchasing investments using only your own cash resources because it has the potential to magnify investment losses. The dealer and advisor, not B2B Bank, are responsible for determining the suitability of investments for their clients and for informing them of the risks associated with borrowing to invest. B2B Bank acts solely in the capacity of lender and loan account administrator. Any loan approval from B2B Bank should not be construed as an endorsement of any investment choice, program or strategy. All loans are subject to credit approval and borrowed monies are due and payable regardless of the performance of the investments purchased. B2B Bank reserves the right to request additional information or documentation at its sole discretion. The B2B Bank Investment Loan Program is available exclusively through licensed financial advisors. ^®B2B BANK is a registered trademark of B2B Bank.