Leveraging is simply the borrowing of money to purchase investments with the intention of increasing wealth. This strategy has become very popular in Canada. Most people have engaged in a very common form of leveraging by buying a house. When you use someone else’s money to purchase an investment like a house you are leveraging.
With traditional investing you designate a portion of your income each month to purchase investments. Eventually your portfolio will grow over a long period of time. With the leveraging concept you are borrowing money to make one large single deposit. You still use a portion of your income each month but now you are paying interest on your new investment loan.
Leveraging can significantly multiply your gains, however, it can also multiply your loses. This is why you have to very carefully consider whether or not this strategy is right for you.
There are several factors to consider before you take on this investment idea that is considered very high risk.
- You must have sufficient financial capacity to service any long term loan that you take on.
- You should have a very good investment knowledge.
- You should have a long term time horizon for this investment of 10 or more years.
- Your total debt service ratio should not exceed 35 percent.
- Your employment and income should be very stable and predictable.
- Your debt to net worth ration should not exceed 30 percent.
- You should have a high risk tolerance.
- Your investment objective should be for growth as opposed to income.
- You should probably not start a leveraged plan over the age of 60.
Another consideration is that, at this time, the Canadian Income Tax Act allows the interest paid on loans to invest to be tax deductible. This can significantly reduce your cost and therefore improve your net return.
There is a lot to consider when deciding if you want to leverage your investments. This is a higher risk strategy and is certainly not for everyone. However, if you qualify for this type of investing you can increase your gains over the long term. Make sure you find an advisor who has experience in investment leveraging and you have all the risks thoroughly explained before you proceed.