You have heard about borrowing to invest, but does it make sense for you? Ideally the return on investment should be higher than the cost of borrowing - otherwise the cost outweighs the benefit. Depending on the type of loan, the interest rate environment and your personal financial objectives, borrowing to invest may be a strategy worth considering as part of your long-term financial plan.
RRSP loans: A low interest borrowing option
Contributing the maximum amount to your RRSP on an annual basis is one of the best ways to achieve a financially secure future. Even if you have missed several years, the Canada Customs and Revenue Agency allows you to carry forward unused RRSP contribution room.
Given the challenge of coming up with sufficient funds to contribute each year, many Canadians opt for an RRSP loan. Paying down a loan over an extended period can prove to be much easier than saving, because the funds within your RRSP are growing on a tax-free basis. This tax benefit should offset some if not all of the borrowing costs, and because there are no restrictions on paying down an RRSP loan, you can also apply your tax refund to the principal to pay it off faster.
A CIBC RRSP Maximizer Loan™ offers access to larger amounts (up to $50,000), with an amortization period of up to 10 years. There is no penalty for paying off your loan early, and you can apply any time throughout the year. For more information, contact your CIBC advisor.
Borrowing for non-registered investments
If the right opportunity presents itself, you may wish to borrow funds for an investment opportunity outside your RRSP. If used to invest, your loan interest may be tax-deductible.
For example, if you earned $8,000 in investment income, and incurred interest costs of $1,000 on the funds borrowed, you would only pay income tax on $7,000 (depending on your marginal tax rate). Be sure to consult with a qualified tax specialist before implementing any type of investment-borrowing strategy.
Depending on market conditions and your risk tolerance, a personal loan or line of credit may be two viable borrowing options.
A CIBC Personal Loan offers a structured payment over a specified term, so you'll always know what your monthly payments will be. Flexible payment options allow you to choose a schedule that works best for you, and there's no penalty for paying your loan off early.
If you prefer to have a pool of funds to draw on when investment opportunities arise, a CIBC Personal Line of Credit will give you the flexibility to invest at a moment's notice. Pay interest only on the amount you use.
Remember, whatever option you choose, you'll receive an even better rate on your loan or line of credit by using the equity in your home or other assets as collateral.
Tip: It's recommended that you borrow to invest outside your RRSP only if you are debt-free, have maximized your RRSP contribution room and are in a 40 per cent or higher marginal tax bracket. For more information talk to your CIBC advisor.