Borrowing to build your investment portfolio
The concept of borrowing funds with the purpose of subsequently investing them can offer many benefits but, before embarking on this option, you should do your research and make sure that it is the most appropriate solution for you and that the cost of borrowing is lower than the return on investment that you expect. Here are some ways to do it:
Taking out an RRSP loan
An RRSP allows you to contribute up to a set maximum amount of funds annually (and also carry forward contributions from previous years that you haven’t used) and make the most of tax savings. Taking out an RRSP loan can be a great way to maximize your savings, as the money that is held within the RRSP grows tax free, which can offer an effective method of offsetting some of the borrowing costs. There are also no restrictions on paying down an RRSP loan.
Borrowing for non-registered investments
There are other options for borrowing to invest without using your RRSP, such as a personal loan or line of credit. This is generally recommended only if you have already used up your RRSP contribution allowance and are in a 40 % or higher tax bracket. The benefits of these options are the fact that you can often choose flexible repayment options and benefit from no penalties on early repayment of your loan. If you are able to, using any equity held in your assets can secure you a superior interest rate. What’s more, it may be the case that the interest on your loan is tax deductible if you can evidence the fact that it has been used to invest.