Investment with line of credit, is it possible ???

[fan_med]

Hi there,

 

Any one have an experience on investment with line of credit during residency ?

 

Some personal finance advisers say that we could expect a growth at an average annual rate of 6 to 7 per cent after fees (Ref: How Rob Carrick would invest $10,000 at The Globe and Mail). With the interest rate of 3 per cent of line of credit, I should think we can use that to invest !!!

 

Any comment about that ???

 

Thanks !!!

 

F_M

[Laika]

Of course you can use it to invest.

 

Leveraging to invest is aggressive, however. Equities earn a higher rate of return than fixed income because they compensate the investor for taking on additional risk. We've had several years of great returns. It's entirely possible there may be several years of depressed returns going forward. Would you be able to sleep if your investments dropped $40,000? Would you continue to hold them or panic and sell?

 

The interest on the LOC is usually tax deductible, but you would also have to pay income tax on your investments if held in a non-registered account.

[cheech10]

Is it worth it? Say you take $100,000 out of your LOC and buy equities that return 6%. You make a whopping $6,000 capital gain. Take out $3,000 of interest cost. Take off another $500 in income tax. Congrats, you put your LOC at significant risk for a $2500 gain in 1 year. If there is any chance you might need the LOC money in future, this doesn't seem worth it to me. Hold off until you have savings to start investing.

[Satsuma]

Interest on your LOC is not tax deductible. Only the interest on your government student loans.

 

I would think long and hard before you consider borrowing money to invest.

 

Have you actually spoken to a financial advisor who recommended this for your current situation? I would be pretty cautious if they advised this - they probably have their own interests in mind rather than your own. But only you know what your risk tolerance is.

 

Of course you can use it to invest.

 

Leveraging to invest is aggressive, however. Equities earn a higher rate of return than fixed income because they compensate the investor for taking on additional risk. We've had several years of great returns. It's entirely possible there may be several years of depressed returns going forward. Would you be able to sleep if your investments dropped $40,000? Would you continue to hold them or panic and sell?

 

The interest on the LOC is usually tax deductible, but you would also have to pay income tax on your investments if held in a non-registered account.

[Laika]

Interest on your LOC is not tax deductible.

 

If you use the borrowed money to buy income-generating investments, as the OP suggested, interest on the LOC is tax deductible. See:

 

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html

 

I still think it's a bad idea.

[Satsuma]

If you use the borrowed money to buy income-generating investments, as the OP suggested, interest on the LOC is tax deductible. See:

 

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html

 

I still think it's a bad idea.

 

 

As long as it is not in the form of capital gains, interesting. I see what you meant.

 

Yes, I have to agree it is still a pretty risky idea.

[coastalslacker]

I know some people who've done this. I can think of one of them who lost a tonne of money.

 

I put 30k from the LOC into a business opportunity as a resident and have been happy so far.

[fan_med]

I know some people who've done this. I can think of one of them who lost a tonne of money.

 

I put 30k from the LOC into a business opportunity as a resident and have been happy so far.

 

It is very helpful and exciting your insight, many thanks !

 

I do not think I will put 100k of my LOC to invest as you say, but I want to start with something like 10k or 20k just to be used to do that later.

 

Coastalslacker, Could you give me some advice how you invest your 30k pls !

 

F_M

[coastalslacker]

My approach isn't broadly applicable. My brothers are entrepreneurs and despite the conventional wisdom about not mixing finances and family, I trusted the fact that they're both as smart and hard-working as I am. Like I said, good so far.

[fan_med]

My approach isn't broadly applicable. My brothers are entrepreneurs and despite the conventional wisdom about not mixing finances and family, I trusted the fact that they're both as smart and hard-working as I am. Like I said, good so far.

 

You are lucky !!

[KennethToronto]

Unless you can afford to lose it completely, don't use borrowed money to invest (gamble)