Simply put, investment leverage is borrowing money to purchase investments. Investment leverage comes down to understanding what borrowing to invest involves, including the risk, and determining if it makes sense in your financial position to use this strategy.
With investment leverage, rather than making a series of small contributions over a long period of time, you borrow a larger amount and invest it all at once. In theory, this allows a much larger investment to grow for your full investment period. Then, instead of making additional contributions to your investment, you make interest payments on your loan.
There are two reasons why individuals consider the use of investment loans:
- Compound returns. An investment loan allows a larger amount to grow for longer which may generate a larger long-term return than regular deposits over time.
- Tax deductibility. Interest charged on an investment loan is generally tax-deductible. This reduces your cost for the investment loan. By deducting loan interest, you’re reducing your cost of investing and increasing the chance that leveraged investing will out-perform traditional investing.
Is leveraged investing right for you?
If you have a higher tolerance for risk, an investment horizon of at least 10 years, been maximizing your RRSP contributions and have sufficient income to comfortably service an investment loan and applicable taxes, leveraging may be an appropriate strategy for you. We can help you understand investment leverage and help you decide whether an investment loan is right for you based on your individual circumstances.
Important note about the risk of investment loans:
There are risks and rewards associated with leveraged investing. Borrowing to invest can magnify losses as well as gains. If you are interested in leveraging, please ensure you have all the facts to make an informed decision and discuss this strategy with a qualified financial advisor before you implement anything.
If you would like more information please contact us.