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17 February 2012
INVESTOR ALERT: The Risks of Borrowing Money to Invest

SAINT JOHN – The New Brunswick Securities Commission is warning investors about the potential for serious long-term financial hardship when borrowing money to invest.

“There are substantial risks and investors need to know all the facts before deciding if borrowing money to invest is right for them,” said Rick Hancox, Executive Director, New Brunswick Securities Commission. “Ultimately, investors should know who they are dealing with and fully understand what they are investing in.”

Borrowing to invest, also known as leveraging, is a legitimate investment strategy. It may seem to have many advantages; however, it is not suitable for everyone and may not work out as planned.

Borrowing money to invest involves taking out a loan and using the lump sum to invest in a mutual fund or other investment product. The expectation is that the returns on the investment will be more than sufficient to pay the interest on the loan. As the money borrowed is being used to invest, the interest paid on the loan is tax deductible and provides additional cash at tax return time. While there are many ways that leveraging can be done, the underlying concept is the same.

The biggest drawback to using a leveraging strategy is what happens if the investment drops in value. The returns won’t be enough to pay the interest, additional collateral is required to secure the loan and you are still left with a large loan to pay off.

“There are suitability criteria set out by the industry that your financial adviser should carefully review with you before attempting this type of strategy,” said Hancox. “Investors should fully understand the risks and be extremely cautious if considering borrowing beyond their financial means.”

The NBSC outlines the following questions that investors should answer before making a decision about borrowing to invest: 

  • Are you dealing with a reputable and registered investment adviser and firm?
  • Has your adviser reviewed the suitability criteria? Do you understand them and do you meet them?
  • What are your investment objectives? Is leveraging the only strategy that will help you achieve them?
  • What is your risk tolerance? How much money can you afford to lose?
  • What are the fees for setting up the loan? Are there on-going fees or fees for early withdrawal from the investment or the loan?
  • Do you fully understand the leveraging strategy and how you will make (or lose) money?

For more information about borrowing to invest and working with your adviser, please visit the New Brunswick Securities Commission website www.investinknowingmore.ca or call 1 866 933-2222.

17-02-12

ABOUT THE NEW BRUNSWICK SECURITIES COMMISSION
As an independent provincial Crown corporation, the New Brunswick Securities Commission oversees the capital markets in New Brunswick and regulates those that sell or manage securities. Its mandate is to protect investors from unfair, improper or fraudulent practices, and to foster fair and efficient capital markets and confidence in capital markets. The Commission is funded by regulatory fees paid by those operating in the investment industry including public companies, mutual funds and over 7000 registered individuals and firms.

Media Contact
Michelle Robichaud, Communications Officer, 506 643-7045 or 1 866 933-2222
Michelle.Robichaud@nbsc-cvmnb.ca

Link
Brochure - Borrowing to invest