Leverage Investment

Making the case for Balance Transfers to Invest in RRSP

One of the great features most credit cards

companies have is the ability to payoff

balances owing in another financial

institutions. An interesting way to take

advantage of this feature is by transferring

money out of your credit card to a chequing

account. In most cases credit cards issuers

offer promotional interest rates for a certain

period of time to complete this transactions

(i.e. 0.99% for 15 months.)

On the other hand, the concept of borrowing to

invest (leverage) has been known for a long

time. Altough this type of strategy is not meant

to fit everyone needs, it’s an investment option

that combined with tax sheltered programs can

be appeling.

Let’s take, for example, an individual residing

in Ontario who makes 75K a year and has a

RRSP contribution room of 15K , a credit card

with 15K available and an offer of 0.99% for 15

months.

Our individual has two choices to catch up with

its contribution in the next 15 months:

Contribute $1,000 a month or use her credit

available to make a lump sum and repay the

loan in the next 15 months. Lets see the

outcome of each one of the options.

Catching up by making 15 equals

contributions.

Total amount invested: 15,000

Earning assuming a 5% return: $445.50i

Total Savings in 15 Months: 15,445.50

Tax deduction to be claimed next year

Catching up using a Balance Transfer on

the Credit Card.

Total amount invested: $15,000

Balance transfer fee: $150.00

Total Interest paid: $100.58

Total Tax Saving this year: $3,312.00ii

Total out of pocket expense: $11,688.00

Earnings assuming 5% return: $965.34

Total Savings in 15 Months:15,965.34

Advantages of Leveraging:

Use the tax return to reduce loan. If wanted, our individual can make an extra payment using the tax return and will save interest.

Invest the whole amount since first day. This optimize the compound interest earning.

Use less out of pocket dollars. Will have more wealth investing less money.

Acumulate more wealth. In our example investment earnings are 117% more using borrowing to invest.

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1 Interest compound monthly

1 Based on the 2014 Average Tax Rate in Ontario

i Interest compound monthly

ii Based on the 2014 Average Tax Rate in Ontario