With a Leveraged Loan, you borrow money with the sole purpose of investing it. If the net return on investment after tax* is higher than the cost of borrowing the money (the loan rate), you turn a profit.
This strategy is not appropriate for everyone because it requires a portfolio made up of 100% growth shares (no fixed-income investments except high performance bonds). Before you increase your risk through leveraging, make sure you’re comfortable having a higher proportion of shares in your portfolio.
The interest paid on a loan used to invest in a tax-free savings account (TFSA), registered retirement savings plan (RRSP) or registered education savings plan (RESP) is never deductible.
The term “Leverage” refers to the magnifying effect. If the strategy works, you’ll magnify your rate of return. If returns are low, the negative impact is also magnified.
*Tax is calculated on the income generated, minus the tax deductible portion of the costs