What are investment loans?
We tend to think of debt as something to be avoided or paid off as quickly as possible. But not all debt is created equal. Some kinds of debt are designed to help you improve your financial position. One such debt is a mortgage – which allows you to purchase an asset (your home) that may increase in value over time. Another example is an Investment Loan. An investment loan is a loan used to purchase an investment, such as a stock, bond or mutual fund.
How investment loans work
Leveraged investing via investment loans is quite a simple concept:
- You borrow money
- You invest the money
- You pay interest on the loan
- When you sell the investment, you repay the loan and keep any investment growth
The risks of investment loans
Because investment loans enable you to invest more than you could if you only used your own money, you may be able to accelerate wealth accumulation. For example, when you invest $10,000 of your own money in an investment that goes up 5% in a year, you’re $500 ahead. When you borrow and invest $100,000 in the same investment, you’re $5,000 ahead, less the amount of interest you paid.
However, just as your potential gains could be magnified, so could your losses. If you invest $10,000 of your own money and the investment goes down 5% in a year, you’ve lost $500. But if you borrow and invest $100,000, and it goes down 5% in a year, you’ve lost $5,000, plus any interest you paid on a loan. For this reason, leveraged investing is only appropriate for people with a higher tolerance for risk.
Another factor to consider is the interest rate on your loan. You’ll need to pay the interest on the loan no matter how your investments are doing. To come out ahead, your investment gain will need to be greater than the amount of interest you pay while using this strategy. The higher the rate of interest you’re paying, the more investment growth you need to come out ahead. And, if your investment is worth less than your outstanding loan when you decided to sell, you need to make up the difference out of your own pocket.
Investment loans come with different features. With Manulife Bank, you can borrow the full amount you want to invest, or you can invest some of your own money and borrow up to three times that amount to add to your investment. You can also choose to pay interest only or to pay a combination of interest and principal. Learn more about Manulife Bank’s investment loans.
Talk to your advisor
Because leveraged investing isn’t for everyone, it’s important to talk to your advisor about whether it’s right for you. If it is, it could be a powerful tool for helping you achieve your financial goals more quickly.
Because leveraged investing enables you to invest more than you could if you only used your own money, you can accelerate wealth accumulation.