An interesting conversation arose the other day about borrowing to invest. For a lot of people, especially older generations, paying off your mortgage and having little to no debt was the apex of financial freedom. Now it seems, debt isn’t looked upon as such a bad thing, especially when you consider the advantages of owing money, as oxymoronic as that may be.
In the conversation it was asked if it would be a good idea to take non registered investments (TFSA and other non-RSP savings) pay off existing secured low interest debt, ie mortgage debt and reborrow that same money and put it back into the investments. The conclusion was that this wasn’t such a bad idea. In essence you end up in the same scenario, in terms of debt and savings/investments, however you would have the additional advantage of being able to deduct those interest costs on the mortgage debt on your taxes. Bear in mind, it may be a good idea to run that idea by your accountant, but by all accounts, it would seem likely that this would be a good way to deduct the interest costs from your mortgage, be it your principle residence or otherwise, and still have tax free savings and investments. It is definitely worth a chat with the financial professionals you deal with and ultimately a portion of your equity or mortgage could be used as a way to get just a little further ahead, after all every little bit helps.
If you are considering borrowing to invest, you might want to think about what type of mortgage product is best suited for your needs. With an equity line of credit, you can have instant access to large amount of cash. Having an available credit of this nature can prepare you when potentially lucrative opportunities arrive. Depending on the length of that investment you will want to consider you options for locking in your rate to a fixed term and percentage because any floating line of credit amounts will be much higher than fixed rate ones. That said it may be just as well to stick with a plain old mortgage product that doesn’t require certain levels of sophistication and hands-on management.
No matter what, borrowing to invest is always much riskier than having your own funds to endeavor with. Many people look to their home as a way to raise capital for self-employed ambitions. Often these can be secondary to your main source of income in the hopes that one day the business you began will become the primary income source, but until then any self-employed journey is typically challenging in its early stages and one must be able to handle the ebbs and flows of that path.
Any plan has to run through the varying degrees of the ‘what if’ test before it comes to fruition. Your home equity is a hard-earned chunk of your nest egg and it is often referred to as the back bone of anyone’s financial fortitude. It can often be relied upon as potential retirement income when those years arrive and things like down-sizing become an option. Often, simply selling your home and buying a smaller property is the best way to take out your equity, set it in a nice safe little investment product, and draw income from it.
A full review of your finances, lifestyle and future goals will give you a good idea of whether or not borrowing to invest is the right move or if it is even possible. This type of strategy is largely based on your age and your ability to absorb potential losses. Those who are more risk adverse may prefer not to but there are excellent opportunities for many people to borrow even a small portion of their equity in an effort to diversify their portfolio.