Borrowing money to invest – MoneySense

Opening a margin account

A simple option to borrow to invest is by using a margin account at a brokerage. Depending on the existing investments in the account, a brokerage will lend up to a certain percentage of the value to an Canadian investor, at a specified interest rate.

You can have access to an amount of “maintenance excess,” which means that money needs to be kept in the account as collateral for borrowed securities. It generally ranges from 30% to 100% of the market value. Larger, established, blue-chip stocks may only have a 30% margin requirement, meaning up to $70 can be borrowed for every $100 invested.

Margin interest rates generally range from 7% to 10% but can vary. The interest is tax-deductible when the borrowed money is being used to invest but not if it is withdrawn and used for non-investment purposes. If stocks fall, in Canada, a margin account investor could have a “margin call” and need to deposit more funds or have to sell stocks to reduce leverage.

Investment and RRSP loans

Investment loans with required monthly principal and interest payments are another option for borrowing to invest. Registered retirement savings plan (RRSP) loans are often at competitive interest rates as low as prime. Non-RRSP investment loans may be at prime plus 1% or more. Interest rates are reasonably competitive because some financial institutions are getting paid twice on the same transaction, earning interest on the loan and generating fees on the investments purchased.

An investment loan may generate tax deductions, but only for the interest portion of the payments, not the full principal and interest payments. Interest on money borrowed to invest in an RRSP or a tax-free savings account (TFSA) is not tax-deductible, however, because the income being earned is not taxable income. Interest paid to earn taxable non-registered investment income (such as outside of a registered account) is tax-deductible.

Using a mortgage or line of credit to invest

Lines of credit or mortgages on real estate can be used to invest, and the interest can be tax-deductible as well. An important distinction is that it is the use of borrowed funds that determines tax deductibility. Borrowing money against a rental property does not make the interest automatically tax-deductible if the funds are used for a personal purpose. Borrowing money to invest—whether it’s in stocks, bonds, mutual funds, exchange-traded funds (ETFs), a rental property or a business—is a common criteria for interest deductibility.

Interest for funds used to finance an income property can be deducted on your tax return, including money borrowed against a personal-use property, like a home or cottage, if the funds are used towards a down payment, renovation or other costs for a rental property that earns rental income.

Is borrowing to invest worth it?

Borrowing to invest can enable an investor to amplify their returns by leveraging their capital invested. But is borrowing worthwhile?

You can come up with different results to support or oppose borrowing to invest, depending upon the time period you pick. But if we go way back to 1935, the long-term average prime lending rate in Canada has been about 7%. Canadian stocks as represented by the TSX have returned 9.5% per year. The S&P 500 in the U.S. has generated about an 11.4% annualized return including reinvested dividends. All figures are as of December 31, 2022.