We use money to spend on items that we want now such as clothes, electronics, and automobiles. But, what about if you use that money to invest for the future and build wealth instead? 

Imagine using your borrowing power to invest. You’re probably doing it with a mortgage or a Registered Savings Plan (RSP). These types of investments have the potential to increase in value over time.

It’s considered a good type of debt because you’re not spending on things that depreciate quickly like clothes, electronics, and automobiles. Therefore, if you’re borrowing to invest, you’ll be investing in your future.

What Is An Investment Loan?

An investment loan is a type of loan that is used to purchase mutual or segregated funds. The purchased funds are held as a collateral which secures the loan; the same way a house is used as a security for a mortgage loan. In addition, the lender holds the funds on behalf of the borrow until the loan is repaid in full. 

What are compound returns?

Compound returns on an investment means that returns are calculated on the initial investment and accumulated growth from year to year. Having a larger initial investment growing is essential for compounding success.

For example, say your initial investment is $100K, if you make 10% per year then every 7 years your money doubles. So hypothetically in 7 years you could have $200K, then in 14 years you could have $400K, then in 21 years you could have $800K, and in 28 years you could have $2.8 million. 

What are the risk of borrowing to invest? 

Borrowing to invest involves a greater degree of risk than a similar purchase using cash. If the value of the investment falls, the borrower would suffer a loss of value beyond what they may have experienced if they invested with only their own money. 

You are also responsible for loan payments irrespective of the performance of your investments. So if your investment drops in value, you’ll lose on the investment and still be required to repay the loan in full. 

Is an investment loan right for me?

Investors who are looking to benefit from an investment loan will have available cash flow, a high risk tolerance, and a long investment horizon. You should speak to your financial advisor to help you determine if borrowing to invest is right for you.