Borrowing to invest – Is it right for me?

Borrowing to Invest; Does it Make Sense?

Borrowing money to invest can seem like an inviting idea. If you have a good strategy, you can succeed and find a route to financial freedom. There are many investments people can make that help them achieve their dreams. One example of an investment is a Registered Retirement Savings Plan or more commonly known as an RRSP. Whether your retirement is five years away or 40 years down the road, contributions to your RRSP can be some of the most important investments you'll make. The great thing about an RRSP is that you can use your contributions to reduce your income taxes for the year.

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This sounds good, but here are some things to consider when you're thinking of borrowing to invest:

• Your current financial situation. If you have high interest debt, you should pay that off first, not add more debt.

• How will you repay the loan if the investment does not work out?

• Why this investment? How will it help you reach your goals?

• How will this investment affect your taxes?

• You still need to repay the loan whether or not your investment works out.

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Cambrian offers RRSP Lines of Credit (RLOCs) to help those who find themselves at the end of the tax year without any funds left to contribute or those who just want to top up their retirement plan. Borrowing money for RRSPs can pay off for certain individuals, while it may not be the best option in other situations. If you're far from retirement, the benefits of compounding interest and the tax deduction you receive could outweigh the interest you pay borrowing the funds.

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Here's an example that demonstrates the potential benefit of borrowing for your RRSP:

You borrow $1,000 and contribute it to your RRSP. The total amount paid to repay the loan over 12 months is $1,033, therefor the total loan interest paid over 12months is $33.

(The example above assumes that your RRSP earns 4.0% interest compounded annually, the loan interest rate is 6% compounded monthly, and the loan is repaid in 12 equal monthly installments of approximately $86. Rates are for illustrative purposes only. They are not intended to be representative of current rates.)

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RLOCs generally need to be paid back within 12 months but can be used again yearly for RRSP contributions. Making a payment to an RLOC with funds received from a tax refund can help pay off the borrowed funds even more quickly. Keep in mind that Cambrian issues RLOCs to make investments through Cambrian, whether an RRSP variable savings, term deposit, mutual fund or other investment.

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If you want to learn more about loans, borrowing and investments, book an appointment with a Cambrian Advisor today.