Investment Loans Are Costing Me $500 Each Month!

Most of my readers know that I got started with leveraged investing back in June of 2021.

I began with a really attractive line of credit from my bank, Tangerine. It offered me a $25,000 loan at just 2.45% (Tangerine Prime – 0.00%). On top of that, I took advantage of record-low margin rates from Interactive Brokers to help me invest even more.

In that post, I also shared some of the qualities I believed were needed for leveraged investing:

• Patience: to let your investment strategy play out
• Disinterest: to not worry about short-term results

It’s now been almost 2 years since beginning my leveraged investing journey, and those two qualities are needed now more than ever!

That’s because my Tangerine line of credit has gotten expensive. It quickly rose from 2.45% to an incredibly high 6.45%—in less than one year! My margin loan hasn’t done much better, rising from less than 2% to around 6%.

Enter the Smith Maneuver

In 2022 I picked up another avenue to gain even more access to leverage. In line with my 2022 New Year’s resolution, in April of 2022 I applied for a home equity line of credit and was approved for a massive $400,000 loan.

And before you ask, no, I didn’t withdraw the whole $400,000 (thankfully!). Instead, my Smith Maneuver strategy saw me “priming the pump” and contributing $60,000 before the end of 2022.

Between my Tangerine LOC, margin loan, and home equity line of credit, I’ve invested approximately $100,000 into VEQT—all using borrowed money.

And boy, is this getting expensive.

Monthly Interest Costs

The carrying cost of my leveraged VEQT position started off pretty well. In 2022, before I began the Smith Maneuver, I paid less than $100 monthly in interest.

But unfortunately, around the time I started “priming the pump” with my HELOC, interest rates in Canada and elsewhere began to rise dramatically. I went from less than $100 per month in May in 2022 to now over $500 per month.

I don’t know about you, but $500 feels like a lot. Especially when it’s a monthly expense and essentially on an experiment that may or may not work out in the long run.

In fact, much of my leveraged investment strategy depends on my investments outpacing my cost of financing. This has become increasingly difficult, with all my loans averaging around 6.5%.

• Interactive Brokers: 5.91%
• Tangerine LOC: 6.45%
• TD HELOC: 6.75%

As you may know, the long-term average return of the stock market is around 8%. That leaves just 1.5% of “wiggle room” in my strategy. That’s a pretty hard sell, especially with the economy potentially entering a recession and inflation still hovering around multi-decade highs.

Dividends to the Rescue?

What’s softened the blow is that I can deduct this investment interest from my income. After accounting for RRSP contributions, I should receive back 31% or $31 on every $100 I spend on my investment loans.

This makes it a bit easier for this strategy to “work.” For one thing, instead of my hurdle rate being 6.5%, I can think of it as 4.5% after taxes—much more reasonable.

And in terms of cash flow, there are also dividends to consider. For example, in 2022 I spent $3,116 in interest servicing my investment loans. But I have also received sizable dividends, totalling $2,062 from my leveraged VEQT position.

This means I only have to make up $1,054 from my pocket.

However, this will look worse in 2023 as it’ll be a full year of 6.5% interest on the much larger average balance of loans than I had in 2022. Unless something changes, I expect to be out-of-pocket around $4,500 because of these loans in 2023—ouch!

What’s worse is I am down on my VEQT investments. So if I were to sell, I’d face even more losses.

Conclusion

I hope this provides an excellent example of what can go wrong when leveraged investing. It’s not all sunshine and rainbows. Rates can rise dramatically, even within a single year.

And as we’ve all seen, the stock market isn’t reliable in the short term—at all. On average, 8% sounds great, but to get that 8%, you need to ride the market turbulence. And that isn’t easy when you’re investing with borrowed money.

I’m hopeful this strategy will eventually win out. But over the short term, it’s anybody’s guess—and it’s not looking good!

Thanks for Reading

I recently wrote a few articles that you may be interested in. This includes my huge update to my best Canadian dividend ETF article and post sharing my top 30 holdings! Consider giving those a read if you think they’ll help you on your financial journey!

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