Where to look when borrowing to invest: credit lines, personal loans and margin accounts are all viable sources

Money Digest, April, 2001 by Talbot Stevens

Leveraging investments can be accomplished in many ways, sometimes without even realizing it. Using a mortgage to buy a house is leveraging.

Sources of investment loans

Most secured lines of credit offer the option of paying only the interest expense, without paying down any of the principal. This keeps the payments as low as possible, but the loan never gets paid off. They can be secured, perhaps by your home, or unsecured. Home equity loans or lines of credit are generally the cheapest source of financing available, often at prime.

With a 2:1 loan, the lender will loan up to $2 for every $1 that the investor provides as collateral. If you have $10,000 of investments, you could borrow up to $20,000 with a 2:1 loan. A 1:1 loan, where the loan matches the amount you invest, is more conservative than a 2:1 loan, and generally has a lower risk of a margin call.

For qualified investors, many lenders also provide 100% financing for investment loans, where no additional collateral is required. The investments purchased with the loan are held by the lender, and the loan is usually paid off over a term of five to 20 years to gradually reduce the lender's and investor's risk.

Interest can be paid on an ongoing basis, as with investment loans, or deferred and charged to your account. Margin refers to the amount of the purchase price that the investor pays, not the amount that is borrowed from the brokerage firm. If the value of the margined investment drops too much, you will face a margin call, and be forced to increase the margin in the account.

To address this, some lenders provide RRSP-linked loans that allow you to borrow without having home equity or non-registered investments. With a self-directed RRSP administered by the lender, you can borrow an amount up to the value of the RRSP for non-registered investing. This would allow you to borrow up to $50,000 if you had $50,000 in RRSPs.

Don't forget ...

The last day to file your 2000 tax returns is midnight, Monday, April 30, 2001.

Always file your tax return even if you owe money. The penalty for late-filing is:

* 5% of the balance owing; and

* an additional 1% of the balance owing for each full month that your return is late, to a maximum of 12 months.

However, according to the Canada Customs and Revenue Agency, if you missed the tax-filing deadline due to circumstances beyond your control, they may waive the penalty and applicable interest. A letter of explanation must be included with your return.

To find out more, check out its Web site at www.ccra-adrc.gc.ca.