Borrowing to invest (otherwise known as financial leverage) is a personal finance strategy where someone borrows funds for investment purposes. Due to the uncertainty of investment returns and the fact there is borrowed money at stake, borrowing to invest is a riskier a strategy than buying the same investments without debt.
When borrowing to invest, people expect the that the value of their investments will appreciate over time. The problem is that most types of investments involve some degree of fluctuation in the value of the underlying asset, and the investor must be able to financially and psychologically whether the potential storm.
Borrowing to invest is an effective way to amplify your wealth building efforts. Using leverage in your portfolio multiplies your returns when your investment’s value is rising. On the other hand, it is a double edged sword and can also act against you by magnifying losses when the investment’s value is falling. This means choosing a wise home for your investment capital is even more crucial when borrowing to invest, and the importance of good advice around both the borrowing and investing sides cannot be underplayed.
When you understand the various ways to borrow money for investment purposes, and the tax implications of borrowing to invest, you will be able to make smarter investment decisions accelerate your ability to maximize your net worth.
Ways to Borrow to Invest
Clients who wish to borrow to invest have different borrowing and investment options from which to choose. The type of investment loan or mortgage will dramatically affect the risk of a leveraged investment strategy and impact the expected investment returns.
What Are the Types of Investment Loans?
Investment loan types include:
1. Mortgage loan – line of credit or traditional mortgage
2. Instalment or term loan (interest and principal)
3. Demand loan (interest only)
Any type of loan can be based on either a fixed or variable rate of interest. Typically home equity loans tend to have the lowest cost and the most amount of flexibility – reason being they are secured against your home and lenders feel most comfortable having this type of collateral to back up the loan.
To minimize the risks of short-term investment volatility, a leveraged investment strategy should only be considered for a long-term period. To determine if a leveraged loan strategy fits for your longer term financial goals, give our office a call. We would be happy to run the math and can help you ensure your borrowing is tax-efficient through proper debt structuring.