There is a useful role for advisors to play in helping clients borrow as advantageously as possible. The lower the cost of an investment loan, the better the risk/reward scenario, and the easier it is for clients to stick to their long-term borrowing strategy through market ups and downs.

“There are lots of ways of borrowing for qualified consumers, including unsecured lines of credit, home equity loans and loans that use other sources of collateral,” says Dave Richardson, vice president of branch sales for Toronto-based RBC Global Asset Management Inc.

B2B Bank, a division of Montreal-based Laurentian Bank of Canada, is the leading third-party supplier of banking solutions to the advisor community and focuses solely on this market. It has recently acquired competitor AGF Trust Co. from Toronto-based AGF Fund Management Ltd., following its earlier acquisition of MRS Trust Co. from Mackenzie Financial Corp. of Toronto.

Other investment loan providers include Manulife Bank, owned by Toronto-based Manulife Financial Corp. and Dundee Bank of Canada, owned by the Bank of Nova Scotia. Various investment loans are also available through the big banks, with terms depending on the investor’s financial position and collateral available.

Depending on the creditworthiness of the client, investment loans from these banking institutions can be designed in such a way that no margin call is triggered even if the value of the client’s assets declines with market gyrations.

By contrast, the typical margin loans offered by many brokerage houses require clients to maintain a predetermined asset-to-loan ratio. If the value of assets declines, clients are required to either decrease the loan or put up more assets as collateral. With no control over the timing of such an event, they could be forced to sell their investments into a bear market to meet these margin requirements.

A no-margin loan offers much greater peace of mind and makes it easier for clients to stick to their leveraging strategy when markets get rocky.

B2B Bank’s investment loan lineup includes four options: the 100% loan, whereby B2B Bank finances 100% of the investment; the 3-for-1 loan, where B2B Bank lends up to three times the value of assets pledged; the 2-for-1 loan, where B2B Bank lends up to two times the value of assets pledged, and the 1-for-1 loan, where B2B Bank matches the value of assets pledged.

The interest costs typically range from prime plus 0.75% to prime plus 1/5%, depending on the size of the loan. The best rate is on loans of $100,000 or more, available at prime plus 0.75%. The dealer and the financial advisor, not B2B Bank, are responsible for determining the suitability of investments for their clients and for informing them of the risks associated with borrowing to invest.

For clients who have paid off all or most of their mortgage, a home equity line of credit can be one of the most effective ways to borrow to invest.

Some loans can be arranged with a defined payback period, while others are interest only. Interest rates may be fixed or floating, depending on the type of the loan. Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc., recommends a defined repayment term, and prefers loans of no more than five years.

“It’s better to have a repayment schedule and get the monkey off the client’s back as quickly as possible,” Mastracci says.

Lise Andreana, founder and financial planner at Continuum II Inc. in Burlington, Ont., agrees that a repayment schedule instills a discipline for the client. It also lowers the risk that the loan will eventually have to be paid off by selling off part of the investment, thereby defeating the purpose of long-term wealth accumulation.

To ensure accuracy when deducting the interest costs for tax purposes, it’s important to separate the interest paid on the investment loan or portion of any line of credit used for investment purposes, and not lump it in with principal repayment or interest costs for money borrowed for other purposes, Andreana says.

“It’s important to track the interest expenses for investment purposes, and separate that from everything else.”

This is the third article in a three-part series on leveraging to invest.