Borrowing to Invest
With interest rates at historic lows, borrowing to invest can be a long term strategy to build wealth. If you have equity in your home you may be able to access it and use it to purchase investments, invest in a business or even pay off higher debt credit cards and loans and used the cash flow saved to invest.
While borrowing to invest can be lucrative, it is also considered an aggressive strategy and requires careful consideration before attempting. The goal is to invest in quality assets that will maintain their value over time, and will not impact you negatively should their value temporarily decrease. The key is to ensure your investment is generating after-tax returns that are greater than any after-tax interest costs.
It is important to note that borrowing to invest is regulated by the Income Tax Act. Those borrowing to invest should consider the following:
- The borrower is legally obliged to pay interest and must sign a loan agreement that details what interest charges are to be paid when.
- The interest amount must be deemed reasonable. The Canada Customs and Revenue Agency accepts the use of public lending rates charged by banks.
- The purpose of borrowing to invest must be to earn income from a business or property. Examples include borrowing to invest in a rental property or mutual funds that generate interest returns.