Investment Loans in Canada
Investment loans in Canada exist to help you take advantage of opportunities when you don’t have the necessary funds on hand. One of the best ways to secure this type of funding is to tap into your home equity, Keep reading to learn more about investment loans and how you, as a homeowner, can use them to your advantage.
What Are Investment Loans in Canada?
With an investment loan, you receive a lump sum to put towards an investment such as real estate or stocks. An investment loan can help you reach your financial goals faster by delivering greater returns than you’d achieve with your own funds.
For one, you’ll get the compound growth process started sooner rather than later. This means higher gains for you in the long run.
Investment loans also allow you to take advantage of something known as leverage. With leverage, you control a large asset (i.e. a stock portfolio or house) for little upfront cost because someone else puts up most of the money.
If your return on investment exceeds your loan’s interest rate, you get to keep the excess profit for yourself. This can produce substantially higher returns than you would’ve been able to achieve with your own money.
Say, for example, that you invested $10,000 of your own money into the stock market and were able to generate a 10% return. That’s solid growth but at $1,000 the profits aren’t much to write home about.
Now, say you instead borrowed $90,000 and combined it with your $10,000 to invest a total of $100,000 in the stock market. That same 10% return would net you $10,000 – double the funds you actually had to put up yourself. Not bad!
Of course, investment loans in Canada aren’t just licenses to print money. You need to be responsible when it comes to investment loans. Let’s take a look at the factors you need to consider next.
Are Investment Loans a Good Idea?
Investing with someone else’s money certainly has its risks.
For starters, leverage can greatly magnify your losses. When you invest with your own money, the worst possible outcome is that you lose everything. When investing with leverage, you can end up owing the money you put in plus some of the borrowed money.
This can lead to all kinds of problems, such as difficulty making interest payments towards the loan and reduced access to other types of credit you may want in the future.
When used responsibly, however, an investment loan can be a valuable wealth-building tool.
Why Choose a Home Equity Loan for Investments?
There are many advantages to tapping into your home equity for an investment loan in Canada. Let’s take a look at them now.
You’re Borrowing Your Own Money
With a home equity loan, you’re unlocking your own money. Here’s how your home equity is calculated:
Because your home is collateral, you’ll typically find the cheapest investment loan rates with this type of borrowing. It’s less risky for lenders while also maximizing your profits as a result of lower interest payments.
People looking to invest with borrowed money in the stock market typically do so using what’s known as margin; however, this can be a very complicated, risky means of investing.
Bad trades can put your account below the minimum capital requirement and lead to what’s known as a margin call. In this scenario, you may be forced to sell assets at unfavorable prices to make up for the shortfall. This is a restriction imposed on margin account holders by the brokerage itself.
When using your own home equity, you enjoy more freedom and a less-complicated borrowing process. As long as you make payments on-time, you’re in the clear. It’s one of the least-complicated strategies for procuring an investment loan in Canada.
Friendlier for Investment Property Purchases
Getting a traditional investment property mortgage can be quite difficult, as mentioned in our piece on HELOCs vs. mortgages. Banks typically expect you to have enough non-rental income to cover the costs of the mortgage. In other words, you need to have a full-time job that makes enough to cover the cost of your primary housing expenses and the investment property’s mortgage.
It’s much easier to get a home equity loan and use that money to purchase your investment property.
The low-interest rates on a home equity loan get even lower when you consider the tax benefits provided by the Canadian government. As long as your investment qualifies under the fairly broad criteria, you’ll be able to deduct interest from your loan.
Qualifying for a Home Equity Loan for Investments
As Canada’s leading home equity lender since 1969, homeownership is enough to qualify you for an investment loan from Alpine Credits.
Unlike the banks with their stringent lending criteria, Alpine Credits makes it easy. We have a simple application process and don’t consider your age, credit, income history, or business history when it comes to approving you for a home equity loan. Instead, we consider your home equity.
If you’re considering a home equity loan for investment purposes, including basement renovations and pool installations, please give us a call at 1-800-587-2161 so we can explain the process and answer any questions you may have.
Qualifying for an Investment Loan as a Non-Homeowner
If you’re not a homeowner, you still have options as far as investment loans are concerned. Here’s a quick rundown of what you need to qualify.
Collateral is Generally a Must
It’s very common to lose money as an investor. Substantial losses can render you unable to make payments on the debt, which is why lenders typically require collateral.
Even margin accounts require collateral as brokerages withhold the right to sell your investments if you can’t make payments.
Collateral can also include your vehicle or some other sizable asset.
Investment lenders will also typically evaluate your credit score, which is an indicator of how you manage debt overall.
A poor credit score resulting from missed payments and other red flags will indicate that you have more pressing financial problems than potentially missing out on a great investment.
Enough of Your Own Cash
Many types of investment loans require that you put up a certain amount of your own capital. For example, a loan might have a 25% minimum equity requirement necessitating $25,000 of your own money per $100,000 you’d like to borrow; however, that’s just the maintenance margin. In Canada, regulators also necessitate a 30% initial margin.
These measures are in place to prevent you from borrowing more than you can comfortably pay off. Again, home equity loans are much less stringent because you’re simply borrowing your own capital.
Frequently Asked Questions
Investment loan interest rates can vary significantly based on your financial situation and what type of asset you’re looking to purchase.
At Alpine Credits, we don’t consider your credit rating, but rather the amount of equity you have in your home, which is why our rates on investment loans tend to be much lower than what competitors offer.
A home equity loan on your primary residence will typically be much easier to obtain than other types of financing for an investment property.
Investment property loans offered by traditional institutions like banks tend to come with much higher interest rates and strict income requirements.
You certainly can! If you own your property, Alpine Credits would be happy to help.
Investment loans exist for non-homeowners as well. The requirements tend to be much stricter, however.
You should only borrow an amount of money you can comfortably repay, especially since investments tend to fluctuate in value.
If you’re not getting an investment loan via home equity, you should also keep minimum margin in mind as this will play a huge role in determining how much money is safe to borrow for investment purposes.