Borrow to Invest Calculator Canada

How the calculator lines up the two plans

Both plans cost you exactly the same each month. In the first, you borrow, invest the whole loan today in a non-registered account, and pay only the interest. In the second, you skip the loan and put that same monthly amount into a TFSA. At the end, the calculator shows what each plan leaves you: for the loan, the investment minus the loan repaid and the tax on the gain; for the TFSA, the full balance, tax-free.

The summary under the result uses letters so you can follow the arithmetic:

• A to D: what the investment is worth, minus the loan (B) and the tax on the gain if sold (C). D is what you keep.
• E and F: what you paid from your pocket over the years, and what that same money would have grown to in a TFSA at the same return.
• G: the difference, D minus F. Positive means borrowing to invest came out ahead.

The loan here is interest-only, so the balance never shrinks and is repaid in one go at the end. Tax refunds from the interest deduction are reinvested, and 2% of the return is treated as taxable distributions each year. No investment fees are deducted from either plan.

Reading a full example: $100,000 for 10 years in Ontario

Here is the example at the top of the page, line by line, using the calculator's default 8% return and a taxable income of $100,000.

• A, investment value after 10 years: about $227,249. That includes the reinvested refunds from deducting the interest.
• B, loan repaid: $100,000.
• C, tax on the gain if you sell: about $17,659 at Ontario and federal rates. Only half of a capital gain is taxed.
• D, what you keep: about $109,590.
• E, what you paid: $54,500 of interest over 10 years at 5.45%.
• F, the TFSA alternative: about $81,806 from the same $454 a month.
• G, the gap: about $27,783 in favour of borrowing.

Notice what drives it. The borrowed $100,000 is invested for the full 10 years, while the TFSA builds up a little at a time. That head start is the whole case for leverage, and the interest is its price.

What moves the answer most

The return. This matters more than anything else. Using the same $100,000, 10 years, Ontario and $100,000 of income, the loan plan is $27,783 ahead at 8% and $6,474 ahead at 6%. Somewhere around 5.3% the two plans tie. At 5% the TFSA wins by $2,787, at 4% by $11,477, and at 0% by $37,408. The loan rate is 5.45%, so you need to earn roughly what you pay just to break even. Always try a lower return than you expect.

Time. Stretch the same loan to 20 years at 8% and the gap grows to about $63,338. The longer horizon also means more years of interest and more yearly tax on distributions; at 20 years the calculator adds about $4,760 of that tax to what you paid.

Loan size. Smaller loans often carry a higher margin. A $50,000 loan shows a 5.70% rate in the calculator, about $238 a month of interest, and a gap of about $13,340 after 10 years at 8%.

Income and province. These change both the refund on the interest and the tax on the gain, and the two partly cancel. At 8% for 10 years, Ontario at $60,000 of income shows about $30,444 ahead, Ontario at $150,000 about $28,897, and Alberta at $100,000 about $30,084. A higher bracket gives a bigger refund each year but a bigger tax bill when you sell.

The interest deduction, and how people lose it

Interest on money borrowed to invest in a non-registered account is generally tax-deductible in Canada, claimed on line 22100 of your return. Each year the deduction lowers your tax, and in this calculator that refund is reinvested. The rule has conditions that catch people. The investments must be able to pay income, such as dividends or interest; the CRA does not allow the deduction when an investment can only ever produce a capital gain. The interest is deductible only while the borrowed money stays invested, so if you take some out to pay off a car or a credit card, the interest on that part stops being deductible. And borrowing for a TFSA, RRSP or RESP gives you no deduction at all. Keep the loan and account statements that show the money went straight from one to the other.

The risks, plainly

• The loan must be repaid in full whatever happens to the investments. Losses are magnified as well as gains.
• The loan rate is usually variable (the bank prime rate plus a margin), so the monthly interest changes when prime changes.
• If investments fall sharply, the investment can be worth less than the loan for a while; staying invested is what allows a recovery.
• Selling in a down market, or stopping payments, can lock in losses.

Borrowing to invest is a long-term strategy. It suits people with stable income, an emergency fund, and the comfort to stay invested when markets fall. Before I suggest a loan to anyone, I want to see three things: the monthly interest fits the budget even if prime rises, there are three to six months of expenses set aside, and the person has stayed invested through a bad year before. If one of those is missing, a TFSA usually comes first.

Other calculators for the same decision

• Leverage vs RRSP calculator: the same monthly money into an RRSP instead of a TFSA.
• Leverage vs TFSA calculator: a longer guide to the loan-or-TFSA question with the break-even return.
• Investment leverage calculator: 1:1, 1:2 and 1:3 loans side by side.
• Mortgage paydown vs borrow to invest: extra mortgage payments or an investment loan.
• RESP vs investment loan calculator: for education savings.
• All calculators, grouped by goal.

Questions people ask about borrowing to invest

Sources I used

• CRA: line 22100, carrying charges and interest expenses
• Financial Consumer Agency of Canada