Investing

Leveraged Investing

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  • Apr 28th, 2020 4:05 pm
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[OP]
Member
Jul 5, 2010
427 posts
181 upvotes

Leveraged Investing

I have a 350k mortgage.
I have 1.2mm HELOC

Have 400k in TFSA/RRSP for both of us. Down about 100k from Feb highs. One of us has a DB pension plan as well.

Recently as market went down, I borrowed 200k from HELOC and bought 100K of Blue Chip dividend stocks (CAD). Average div yieldis about 7.5%. Got in on Mar 23.

Also invested 100k in USD stocks in blue chip defence , tech and financials. Div Yield is a out 4.5%.

My borrowing cost is prime @2.45% - 54% tax = 1.12%

I am up about 15-20%. I plan to pay my mortage and not pay HELOC. Interest on the HELoC can be capitalized and used for reducing tax liabilities.

What are risks of using this strategy? Am I missing anything?

Our annual income is about 325k. All employment.

Still have access to 1mm HELOC. Am I overstretching my self on borrowed money?
Last edited by chicu1981 on Apr 24th, 2020 7:17 am, edited 1 time in total.
26 replies
Member
Nov 8, 2009
475 posts
192 upvotes
chicu1981 wrote: I have a 350k mortgage.
I have 1.2mm HELOC

Have 400k in TFSA/RRSP for both of us. Down about 100k from Feb highs. One of us has a DB pension plan as well.

Recently as market went down, I borrowed 200k from HELOC and bought 100K of Blue Chip dividend stocks (CAD). Average div yieldis about 7.5%. Got in on Mar 23.

Also invested 100k in USD stocks in blue chip defence , tech and financials. Div Yield is a out 4.5%.

My borrowing cost is prime @2.45% - 54% tax = 1.12%

I am up about 15-20%. I plan to pay my .Portage and it pay LOC. Interest on the LoC can be capitalized and used for reducing tax liabilities.

What are risks of using this strategy? Am I missing anything?

Our annual income is about 325k. All employment.

Still have access to 1mm HELOC. Am I overstretching my self on borrowed money?
As far as I can tell your more than fine and can probably borrow a lot more than that. Your 7% yield will cover any cash flow if you need it but it looks like your capitalizing the interest so no worries there. As long as your well diversified even if a few companies cut their dividends you'll still have an amazing yield. The only risk I can see is if your sector where you work is not 'immune' to any pandemic related job losses. Looking out further just make sure your job is immune to any prolonged recession not necessarily related to pandemic. Otherwise just keep chipping away at it on every dip. There's no way you'd run into any cash flow issues based on your income and yield assuming no job losses.
Member
Jul 4, 2018
393 posts
317 upvotes
chicu1981 wrote: I have a 350k mortgage.
I have 1.2mm HELOC

Have 400k in TFSA/RRSP for both of us. Down about 100k from Feb highs. One of us has a DB pension plan as well.

Recently as market went down, I borrowed 200k from HELOC and bought 100K of Blue Chip dividend stocks (CAD). Average div yieldis about 7.5%. Got in on Mar 23.

Also invested 100k in USD stocks in blue chip defence , tech and financials. Div Yield is a out 4.5%.

My borrowing cost is prime @2.45% - 54% tax = 1.12%

I am up about 15-20%. I plan to pay my .Portage and it pay LOC. Interest on the LoC can be capitalized and used for reducing tax liabilities.

What are risks of using this strategy? Am I missing anything?

Our annual income is about 325k. All employment.

Still have access to 1mm HELOC. Am I overstretching my self on borrowed money?
Got in March 23 (all bought on same day? Smiling Face With Smiling Eyes)
400 Rrsp TFSA
1M more scope
20% increase
Dreams unlimited Smiling Face With Smiling Eyes
Deal Fanatic
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Sep 1, 2013
5996 posts
744 upvotes
As @TGokou stated above, the main risk you need to consider is job loss by you and your partner. How would you pay for your mortgage and living expenses if this were to happen? Would you be forced to sell your portfolio at a loss?

Also keep in mind that HELOCs can be called at any time.
Member
Nov 8, 2009
475 posts
192 upvotes
CheapScotch wrote: As @TGokou stated above, the main risk you need to consider is job loss by you and your partner. How would you pay for your mortgage and living expenses if this were to happen? Would you be forced to sell your portfolio at a loss?

Also keep in mind that HELOCs can be called at any time.
I know it's possible but has anyone heard it actually happened assuming you make all your payments on time?
Member
Dec 26, 2019
290 posts
237 upvotes
I had started a similar thread a couple of weeks ago, and I still feel fairly comfortable going ahead. I'm taking the following actions to mitigate risk:
- Only investing in blue chip companies. Low risk of dividend cuts, and even lower risk of going out of business.
- Only investing where I can get a dividend yield of 6%+. I'll average up if I can get 7%, and again at 8%. My goal is to only use dividends to pay off my loan over about 12-15 years. Having high enough yields should cover the risk of having interest rates increase or having a dividend cut.
- I'm looking to invest in 8-10 Canadian companies across three industries to diversify. I know I will have some heavier concentrations in banking, but not much I can do about that if I'm looking for higher dividend yields.
- I have enough cash in my HISA to cover at least 6-9 months of living expenses. I also am in a 2-income house.
Member
Dec 26, 2019
290 posts
237 upvotes
TGokou wrote: I know it's possible but has anyone heard it actually happened assuming you make all your payments on time?
That feels like a horror story that may have happened in the US during the last recession. The reason the vast majority of us take out a HELOC is because we don't have enough cash sitting around to pay for what we want to pay for. If banks willy-nilly forced repayment of the entire loan, most HELOC holders wouldn't be able to pay. It's not a risk I would worry about unless you get into serious financial trouble otherwise and can't make minimum payments.
[OP]
Member
Jul 5, 2010
427 posts
181 upvotes
reversi wrote: That feels like a horror story that may have happened in the US during the last recession. The reason the vast majority of us take out a HELOC is because we don't have enough cash sitting around to pay for what we want to pay for. If banks willy-nilly forced repayment of the entire loan, most HELOC holders wouldn't be able to pay. It's not a risk I would worry about unless you get into serious financial trouble otherwise and can't make minimum payments.
I plan on not paying the interest on HELOC. I wan to capitalize it. I plan to pay the same amount on my mortgage as extra payments. I can pay ~$400 extra month in borrowing cost to the bank on mortgage.
Deal Addict
Nov 9, 2013
4025 posts
3847 upvotes
Edmonton, AB
TGokou wrote: I know it's possible but has anyone heard it actually happened assuming you make all your payments on time?
I guess it depends on the underlying value of the home. If the home value decreases by 20-30% I could see the bank requesting a payment to get back to the 80% LTV minimum for the HELOC.

Biggest external risks with leveraged investing is 1) Margin calls and 2) Debt service. If you have a plan to manage these risks (and your own behaviours) then I'd say go for it.
Keep calm and go long
Deal Addict
Jul 12, 2008
3144 posts
981 upvotes
GTA
- Thanks for the taxes you pay on that annual income.
- Leverage is something your partner might not be comfortable with so make sure this is sorted out adequately.
- I am a millennial but you seem older, anything above mid 40’s might be too risky to do this depending on your target retirement date.
- You should be able to make enough gains to pay off the remaining balance on your mortgage if you bought a bit more at the end of March.
- The TFSA/RRSP is it all equities? There is still space to get deals but you have to look closer.

The billionaires are richer now than before the crisis according to Forbes and the market hasn’t even fully recovered yet.
Deal Addict
Nov 9, 2013
4025 posts
3847 upvotes
Edmonton, AB
badmus wrote:
The billionaires are richer now than before the crisis according to Forbes and the market hasn’t even fully recovered yet.
There is a lot of hate for billioniares, and I think wealth disparity is a major problem in modern society, but shouldn't billionaires be allowed to get richer?

Why are these people rich in the first place? Likely because they (or someone in their family) created tremendous value for society. As a consequence, they have been able to compound their capital. Doesn't it make sense that in a bear market or time of sell off those who are compounders do better than those who aren't? It goes back to the old addage - In a market crash assets are transferred to their rightful owners.

Also those Billionaires that are leeches and don't actually create value generally don't stick around as their family wealth is typically gone within 3 generations.

It may seem "unfair" but not everyone can be a professional athlete, movie star, successful musician, etc.

Anyways, this is a totally off topic rant so I apologize.

To move it back on topic, there's a Smith Maneuver thread the OP may find interesting as well.
Keep calm and go long
Deal Addict
Jul 23, 2007
4352 posts
2756 upvotes
I wish you luck with your plans to use leverage. I certainly could never do it when investing, and I've seen too many really smart professional investors fail, going back to the last century and perhaps not in all cases but I'm sure a few, where their financial empires collapsed due to their use of leverage.
Deal Addict
Jul 12, 2008
3144 posts
981 upvotes
GTA
Stryker wrote: I wish you luck with your plans to use leverage. I certainly could never do it when investing, and I've seen too many really smart professional investors fail, going back to the last century and perhaps not in all cases but I'm sure a few, where their financial empires collapsed due to their use of leverage.
Technically mortgage and student loan especially post graduate ones could fall under your definition. Leverage is risky but this case looks like a very safe situation compared to people over extended on their mortgage.
[OP]
Member
Jul 5, 2010
427 posts
181 upvotes
I understand that I could lose. I am mentally prepare to lose 30% and unwind thr whole scheme. I am able to take 60 loss.
[OP]
Member
Jul 5, 2010
427 posts
181 upvotes
That is exactly what I am trying to do. With the downturn in market, I got my entry point.
Deal Addict
Jul 8, 2013
1697 posts
2122 upvotes
Red Deer, AB
chicu1981 wrote: That is exactly what I am trying to do. With the downturn in market, I got my entry point.
Do you have an exit strategy?
TFSA: XAW | RRSP: VEQT + VAB | Non-Reg: Dividend-paying individual stocks (tax purposes)
[OP]
Member
Jul 5, 2010
427 posts
181 upvotes
TuxedoBlack wrote: Do you have an exit strategy?
Intend to pay interest each month but to my mortgage.

Dividends will be reinvested. I will have to pay tax on dividends and receive tax credit on the HELOC interest.

Review yearly. As long as I am net up, I will keep this going. I am comfortable with the risk.
Deal Addict
Jul 8, 2013
1697 posts
2122 upvotes
Red Deer, AB
chicu1981 wrote: Intend to pay interest each month but to my mortgage.

Dividends will be reinvested. I will have to pay tax on dividends and receive tax credit on the HELOC interest.

Review yearly. As long as I am net up, I will keep this going. I am comfortable with the risk.
Makes sense to me. Go for it!
TFSA: XAW | RRSP: VEQT + VAB | Non-Reg: Dividend-paying individual stocks (tax purposes)

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