Debt isn’t always negative. Here are some times when it’s a good idea.
Borrowing to invest in an RRSP
If your client has RRSP room, borrowing to max-out contributions can reduce the tax drag, and may generate a tax refund that can pay down the loan or be directed to other high-rate loans. While RRSP loan rates are usually favourable, clients need enough cash flow to be able to make monthly payments.
Read: 4 things to consider when borrowing to invest
Borrowing to buy rental property
This is a good strategy if the rental income can cover the mortgage and taxes. Borrowing costs can be written off and this strategy is good if you can achieve a better rate of return on the funds that would otherwise be tied up in the property. Clients need to decide between commercial and consumer property, based on how much involvement they want, the condition of the building and the affordability. Commercial properties cost more than residential dwellings, but there’s a better chance you’ll get longer-term tenants.
Read: Good debt versus bad debt
Borrowing to invest
This is a risky strategy, and clients should only borrow what they can afford to lose. It’s best if they stick with safer securities such as blue-chip equities or property. The benefit is interest payments can be written off.
Read: Beware leveraged loans