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Discussion Starter #1
Hi,

I have access to a line of credit with my bank at 7.31%. I was thinking of taking out some money and use it to invest in an etf like XML (ISHARES EDGE MSCI MIN VOL EAFE INDEX ETF (CAD-HEDGED)) which pays 8.1% in dividends (MER 0.37%) and use the dividend payments to pay off the monthly interest charges. That sounds like a good idea to me and I'm wondering why I have not thought of this earlier +the interest payments are tax deductible too.

Are there any pitfalls I'm not seeing here? I realize that the capital has to be returned at some point in the future - but I hope I'll get some growth in the ETF over time, too.

Thanks,
Ron
 

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Personally I'm not a fan of borrowing to invest because I think the stock market is already risky enough so I'm not a fan of amplifying the risk.

You must look at total (after tax) return to figure out if this is worth it. Not just the monthly payments, but the total return because it doesn't do you any good unless you make a net profit in the end.

But that interest rate is way too high. You could set up a margin account with Interactive Brokers and they will lend you money at 2.0%. You can even take margin loans from TD Direct Investing for 4.25% ... both are much cheaper than what you describe.
 

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Your dividend yield seems way off. Can't imagine any ETF providing that high of a yield. I get 3.166% yield checking with TMX Money (may or may not be accurate). Personally, I never think borrowing to invest is a good idea but YMMV.
 

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Discussion Starter #4
Hi,

I have access to a line of credit with my bank at 7.31%. I was thinking of taking out some money and use it to invest in an etf like XML (ISHARES EDGE MSCI MIN VOL EAFE INDEX ETF (CAD-HEDGED)) which pays 8.1% in dividends (MER 0.37%) and use the dividend payments to pay off the monthly interest charges. That sounds like a good idea to me and I'm wondering why I have not thought of this earlier +the interest payments are tax deductible too.

Are there any pitfalls I'm not seeing here? I realize that the capital has to be returned at some point in the future - but I hope I'll get some growth in the ETF over time, too.

Thanks,
Ron
After crunching some numbers I got this:
I need to either get a better rate from my bank or use another etf.
If I take out $5,000 (seems to be the minimum for the LoC), I would have monthly loan payments of $30.46, I'd able to buy 234 shares at today's price which currently pay a quarlerly dividend of 0.4311 = $100, 4 times a year = annual income from that deal would only be about $40 = <1%... that's probably not worth it... any hints and/or tips on this method?
 

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Yup even a dumb old TD margin account gives you a 4.0% or 4.25% line of credit. I'm not a big borrower but I like being able to draw from this account, if I ever need some cash. It's my LoC.
 

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Never invest money you can't afford to lose. Things change all the time, dividends get cut, stock values go to zero, etc.

Leverage is a useful tool, but it is also dangerous when used improperly. Think of a gun, it can feed you or it can kill you...a lot of people think they know how to use it instinctually, yet we still get both results.

Any money I invest I consider "spent" money, as in I bought a burger spent, as in it can't come back spent.

If it does come back, bonus. If more comes back even better, but at the time of purchase I spent it, so I'd better not need it back again soon.

You can buy a burger on credit, but you'd better have the money to pay it back before that burger costs a lot more.
 

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IMO i have leveraged for the last 38 years,it has worked out for me
as above do not borrow to invest,when the market goes down,the result is not good
your rate is a little high to borrow at,prime plus 3 would be available from most lenders if credit is good,if want to do it
good luck
 

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Very unlikely to succeed:

- you're in too much of a hurry for you to be in a life position to make good investment decisions
- the interest rate is too close to the rate of return a good investor can expect (in other words, you'd have to be good to break even on an average year)
- the high interest rate suggests you are either young or you have gotten in trouble - in either case, it would be far more reasonable to focus on stable investing

I suggest you look at creating a saving plan in which you put money each month into a TFSA and begin to invest it when you feel you have studied sufficiently and have successful model portfolios. Once you have a few years of investing under your belt, including a major market down turn, you might consider leverage but get a better rate.

Having said that, I've borrowed money to max out my RRSP before. If I hadn't, my RRSP wouldn't be as healthy as it is today. In my younger days, I was a struggling real estate investor and didn't have spare cash for RRSP contributions or a new pair of socks.

I'm sure you can see a difference between borrowing a couple of thousand for a couple of months to max out an RRSP contribution and borrowing tens of thousands with the idea of making interest only payments while you do your best to earn back the LoC interest in the markets.
 

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The OP would have had many sleepless nights back in 2008 and early 2009. That kind of market decline can, and will, happen again. I agree with Tom that unless the margins are substantial (total return), too much can go wrong to wipe out that margin. Leverage is a highly risky business.
 

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Borrowing at 7.1% for investment does not make sense. You will be lucky to get long term returns of 8 to 10%, so it is not worth the risk for such a small margin.
 

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Borrowing at 7.1% for investment does not make sense. You will be lucky to get long term returns of 8 to 10%, so it is not worth the risk for such a small margin.
Equity market returns (before costs) like that (per Stingy Investor's Asset Mixer) are likely gone forever. Mid-high single digit is likely the norm going forward given global growth is slowing down commensurate with productivity and population growth.
 

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A 7.1% rate to borrow at is insane for secured borrowing. Try Interactive Brokers -- they lend to me at an average of 1.6% or so, secured by stock.
 

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A 7.1% rate to borrow at is insane for secured borrowing. Try Interactive Brokers -- they lend to me at an average of 1.6% or so, secured by stock.
If you have no house and you have no stock, there is no secured borrowing. I think what the OP is talking about is a vanilla unsecured LOC not a HELOC. As everyone has been suggesting, this idea is a bad one, especially with no capital to secure it with.
 

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If you have no house and you have no stock, there is no secured borrowing. I think what the OP is talking about is a vanilla unsecured LOC not a HELOC. As everyone has been suggesting, this idea is a bad one, especially with no capital to secure it with.
Regardless, the OP is still getting screwed. I have a completely unsecured LoC with TDCT and it is currently sitting at prime + 2.25% (4.95% currently)
I haven't used that LoC in about 4 years. Undoubtedly I could get a better % if I asked for it. If the OP is serious about using leveraged investing, they should at least try to get their cost of borrowing down.

FWIW, I have never borrowed to invest and would suggest it is probably a bad idea for +90% of investors. But, it's a free country (currently).
 

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If you have no house and you have no stock, there is no secured borrowing. I think what the OP is talking about is a vanilla unsecured LOC not a HELOC. As everyone has been suggesting, this idea is a bad one, especially with no capital to secure it with.
Well even if he has nothing to secure it with, once he borrows at 7.1% from the unsecured line, he can use IB to leverage that even more.

So let's say he wants to invest $10k. He could borrow $4000 of it from the 7.1% account, and the balance, at 2%, from IB. The blended interest rate would be 4.04%. Which, assuming a 3% dividend yield on a diversified investment like XIU, doesn't require a lot in terms of growth and is actually cash-flow positive on an after-tax basis for someone in a >30% incremental tax bracket.

Over time, if the investment goes up, cash can be drawn from the IB account to cover off the expensive unsecured loan.

Of course, I don't recommend this (and with IB, on such a small account, there will be other fees and minimum requirements, not to mention the risk of a margin call), but its not necessary to borrow the entire amount for an investment from a single source. Leveraged investors should diversify their borrowing both as to currency and as to type and lender, just like people diversify assets.
 

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To me if I could get a 7.1% return today with no risk at all I would take it. Which means I wouldn't be borrowing at that rate to invest and replace no risk and no tax with risk even for a few more percent return.
 

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Hi,

I have access to a line of credit with my bank at 7.31%. I was thinking of taking out some money and use it to invest in an etf like XML (ISHARES EDGE MSCI MIN VOL EAFE INDEX ETF (CAD-HEDGED)) which pays 8.1% in dividends (MER 0.37%) and use the dividend payments to pay off the monthly interest charges. That sounds like a good idea to me and I'm wondering why I have not thought of this earlier +the interest payments are tax deductible too.

Are there any pitfalls I'm not seeing here? I realize that the capital has to be returned at some point in the future - but I hope I'll get some growth in the ETF over time, too.

Thanks,
Ron
My opinion is borrowing to invest is a good idea in general. Get a margin account. But you need to think this through. To me it is not a great idea to do this as markets are hovering at all time highs. It is better to commence such a plan near the beginning of a new bull market, otherwise you could be in for a very painful experience, soomething like buying a house at the peak and waiting many years to break even.

http://www.theglobeandmail.com/globe-investor/globe-wealth/how-much-investor-confidence-is-too-much/article33697977/

You should read as much as you can about margin debt, & borrowing to invest in stocks, plus tax implications. It can be emmensely profitable if done judiciously.
 

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Assuming one can call a bottom, or near bottom. In 2008/2009, it was a 6 month grind down, a dead cat bounce and a new low in March 2009, before the bull market came on strong for good. Since one cannot and should not try for the bottom (only known in hindsight), one should wait until the moving average is firmly up. Trouble is... the next downturn could be aka Japan and that margin account would be broke by now.
 
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