Borrowing Money to Invest purposes can be a wise financial decision. But it can also be risky, so make sure you know exactly what you’re doing before making such a move.
As with any investment tool, you must recognize and understand the potential risks and benefits to determine if borrowing to invest is appropriate. Consider your overall financial situation, your risk appetite and your ability to withstand losses.
Borrowing-to-invest strategies include topping up your RRSP, borrowing against the equity in your home, and borrowing “on margin” in your brokerage account — an arrangement in which the investment firm lends the investor cash to buy stocks with the account itself serving as collateral for the loan.
Making an RRSP contribution helps you save on taxes. It can even create a tax refund. However, if you don’t have enough money, or haven’t been contributing to an RRSP on a regular basis, should you consider borrowing to top up your RRSP contribution?
For instance, borrowing money to invest when interest rates are high can be costly. Interest charges can add up, and even offset the benefit of making an RRSP contribution.
If you’re planning to use a tax refund to pay off the loan, you’ll need to be disciplined about applying the refund to the loan.
Borrowing Against Home Equity
Home equity is the difference between the value of your home and the unpaid balance of your current mortgage, according to the Financial Consumer Agency of Canada.
For example, if your home is worth $250,000 and you owe $150,000 dollars on your mortgage, you’d have $100,000 in home equity. So, you may be able to borrow money that will be secured by your home equity.
Note that interest rates on loans secured with home equity can be much lower than other types of loans but be aware that you could lose your home if you’re unable to repay a home equity loan.
Of course, there are many choices when it comes to obtaining a loan for investment purposes. One option growing in popularity is an online loan. Often having less restrictions than a bank, online loans also offer speed and convenience.
While borrowing to invest has become more common, that doesn’t mean it’s the right move for everyone. If you can’t afford to lose the money you’re borrowing, you might want to think twice. As always, consulting with a financial professional can be helpful in these situations
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