A Tax-Deductible Alternative
Leverage is simply borrowing money to invest. Investment loans are similar to borrowing money for any large purchase. Rather than saving and waiting, a loan provides the purchasing power you need, today.
When you borrow to buy an item such as a car, your money is going toward something that will depreciate over time. When you borrow to invest, the expectation is that your investment will grow over time, and be worth more when you are ready to sell it.
There are two primary benefits to investing with a leverage strategy.
First, leverage allows you to make a large lump-sum contribution at the start of the investment period. This allows the entire investment to benefit from the power of compounding for the full investment period.
Second, in most cases the interest paid on loans for investment purposes are tax-deductible*. This effectively lowers the cost of borrowing, and reduces the ‘break-even’ return that you must achieve to make leverage investing worthwhile. In many cases the ‘break even point’ – the rate of return at which you’re better off borrowing than simply investing the money you would have paid in interest and taxes on annual investment income – is actually lower than the interest rate you’re paying on the loan!
Based on average historical returns, leveraging has the potential to produce much more wealth than would be possible without a loan, allowing you to substantially increase the value of your investment portfolio over time.
* Tax deductibility of loan interest depends upon a number of factors, with the Income Tax Act providing the framework for determining deductibility. It is advisable to enlist the services of an independent professional tax advisor to consider these factors.
For more information, with No Obligation, please contact: Ken MacCoy, CHS