Is borrowing to invest a good idea? All you need to come out ahead is a return on your investment that’s greater than the interest you pay on the loan. That makes it especially tempting when the market is climbing and interest rates are low, such as right now.
Say that an investor contributes their maximum allowable amounts to their Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). This individual also invests in a non-registered account, and they’re thinking about borrowing to increase their non-registered investments. The extra boost can help them retire earlier or more comfortably. It all sounds good. What could go wrong?
Consider the risks
Borrowing to invest means accepting three risks. First is the impact of a falling market, which no one can predict. Your loss is not only your investment’s decreased value but also the loan interest you’re paying. When you invest with borrowed funds, market losses are magnified.
The second risk is rising interest rates. Any increase in the cost of borrowing reduces your potential gains.
Finally, your financial situation could change. Whether from illness, job loss or any unexpected calamity, you could find yourself in a position where loans become a burden.
We’re here to help
Borrowing to invest can be an effective way to meet a financial goal, but it must be practised with caution – and it’s certainly not for everyone. If you’re thinking about this strategy, please talk to us. We’ll offer guidance based on your financial situation, investment objective, time horizon and personal risk tolerance.