Financial matters: are there solid advantages to leverage?

Many people use loans to grow their investments. Some even borrow money to max out contributions to their RRSPs—a tactic know as leverage. Could it work for you?
For this strategy to be a winner, it's necessary for the cost of the debt (bank loan and interest) to be less than the increase in profits obtained. In other words, the "plusses" (profits) have to be greater than the "minuses" (debts). Even though this leverage tactic can help you accumulate wealth, it still carries a lot of risks. Before you start dreaming in technicolor, look closely at your situation.

Financial matters: are there solid advantages to leverage?

What state are your finances in?

You know the saying “a bird in hand is worth two in the bush”? It's always best to be in good financial standing before trying to get rich with other people's money. To truly take advantage of leverage, you have to have cash. Be good and clear about this before you do anything. If you have trouble paying your current debt you should perhaps forget about this strategy for the time being.

What kind of investor are you?

To be comfortable with leverage, you need to have a moderate-to-high risk tolerance. If you prefer to make low-risk investments, you should avoid investment debt.

Talk with a financial advisor

The best way to know if you have the right profile for this kind of operation is very simple: make an appointment with a financial advisor. During this meeting, several elements about your situation will be assessed, including:

  • Your financial situation in general
  • Your tolerance for risk
  • Your knowledge of financial markets and leverage strategy
  • Your financial goals
  • Your cash situation and your repayment capacity

For better or for worse

  • Best case scenario. Yes, it really is possible to make money if you borrow to invest; many fans of this strategy make significant gains. With leverage, capital yield can increase exponentially. For example, going from a yield of 10 to 25 per cent for the same investment is probably the best you can expect.
  • Worst case scenario. Leverage can, however, result in losses. Just as earnings can exceed expectations, losses can be considerable. Investment debt requires a strict long-term financial framework to be established, or else you may be heading for disaster.

Remember that whether you generate losses or gains, there are always tax implications.

A project that could take you a long way!

Without a doubt, you now have a better grasp of how important it is to do business with a representative from a well-reputed financial institution. Getting sound, reliable advice is the key to moving forward with confidence and achieving your most ambitious dreams.

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