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My advisor is trying to sell me Segregated Fund / investment loan, in summary, it is something like this:

  1. Canada Life (through National Bank) will lend me 100K to invest
  2. The annual interest is 2.7% - that is $2700 per year for me to pay to Canada Life
  3. I can only invest in mutual funds provided by Canada Life. (see list here)
  4. As you can see, the MER is around 3% - 3.5%, higher than normal MF.
  5. The principal of the investment loan is guaranteed, that means if I lost 50% of the principal. Canada Life will pay 25% and I am responsible for the remaining.
  6. My advisor is a friend of mine ( of course :) ), she also owns the similar product from another financial institution and has made pretty good return since 2019.
  7. The annual $2700 interest paid is tax deductible.

I am in my 40's and not new to investment. I have steady income and in my investment accounts I only hold low cost index funds and some active MF's I bought long time ago. I don't need this 100K loan to generate any investment income for me for awhile, probably not needed for 10 years. Our salary is enough to maintain our current life style.

I am fully aware I need to pay the loan interest and the 3% MER which is high. The reasons I am interested are,

1, I believe in long run (10+ years). The US stock market will continue to rise and the MF's I choose can continue to grow at annual rate of 6% to 13%.

  1. I don't have 100K to invest and someone is lending me that much to do so.

  2. The annual $2700 loan interest is tax deductible.

  3. My advisor has it herself.

  4. The underlying MF are managed by reputable fund companies like AGF.

Is there anything I miss? Is Segregated Fund / investment loan worth it? Thanks

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    This is a well structured question. One thing that is unclear is whether you have to put up your own money e.g. 100k (total 200k). If not, could a homeless person simply ask for this loan? The second thing is #5 on the guaranteed. Are you implying that only 50% of the loan value is protected? Another thing is that if you are responsible for the "remaining", does it mean that Canada Life can go to the bankrupcy court to seize your other assets the moment you lose money? – base64 Jan 25 at 8:27
  • @base64..."could a homeless person simply ask for this loan?".. the answer is NO. You will have to apply for it and they can decline if you are not qualified for income or credit score. A homeless person will not be able to get it for sure :) – sean717 Jan 26 at 2:14
  • "Are you implying that only 50% of the loan value is protected?", Canada Life can insure up to 100% of the borrowed capital. If I pay a $400 premium per year. What this means is that, say I got this product today, 10 yrs from now, when the term ends, the 100K capital shrink to 50K, I can walk away because Canada Life (My insurer) will pay 50K to National Bank (my lender). If I don't have the 100% guarantee, say, if I have only 75%, under the same situation, Canada Life will pay 25K loss to National Bank. I need to pay the remaining 25K from my own pocket. – sean717 Jan 26 at 2:14
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    Shame on this insurance company for selling such complicated, bizarre, risky products to people. – Orange Coast- reinstate Monica Jan 27 at 6:06
  • Out of interest: Does your friendly advisor get any commission for this deal or might there be any other financial incentive to sell you on it? Or is she only recommending to go into debt for a 3% MF out of the goodness of her heart? – R.K. Jan 27 at 9:42
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In the US, mortgage rates are so low that there are those who ask, "Would you recommend that people take out a new loan to invest?" I typically respond "it depends" and actually lean towards a "no". [Again, to emphasize - if your question were simply "should I take out a 10 year fixed loan to invest in the market?" many conservative members here would simply answer 'no'. All the other details? "NO!"]

In your case, the term drops to 10, lowering the chance of success. A backtest of 1999-2009 data would show a clear bad decision. But, that's not what bothers me. The 2.7% is an ok number, about what I'd expect. "3.0%-3.5%" annual expense? That is criminal. Morally. Not legally. It's a 1/3 haircut on your final result. If my $100K grows to $200K over this time, you get $143K (I used 3.3%/yr expense). The bank made more than you, and got paid their interest on top of this.

(I did not address the pseudo-guarantee. It's nearly worthless. Even our lost decade of the 2000s was close enough to break-even that the 30%+ cost of this is far greater than the risk they claim to cover)

Friends/Family and finance are a tough mix. In this case, your friend isn't doing you any favors.

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  • The relevance of the first two sentences confuses me. Are you comparing OP's "investment loan" with taking out a 2nd mortgage so as to invest more money? – RonJohn Jan 25 at 14:00
  • Yes. They are both "borrowing to invest" and I make the point that the deal the friend offers is far worse in comparison. (It's a math-logic type approach. If I prove B>C and A>B, then A is surely greater than C. Here, instead of greater, it's Worse. – JTP - Apologise to Monica Jan 25 at 14:02
  • I think I clarified it. If you disagree, of course roll it back. – RonJohn Jan 25 at 14:06
  • NP - if you think I went off on a tangent, I guess I did. I might find the other Q&A and link it for background. I have to go teach now. I hate Zoom, and remote. – JTP - Apologise to Monica Jan 25 at 14:08
  • @JTP-ApologisetoMonica.. Thanks for your answer. I agree with you. 6% (2.7% + 3.3%) interest is pretty bad. But someone is lending me 100K with little effort from me. It all comes down to I believe next 10 years the investment can bring annual 10% return. So I can get 4% return :)...Do you think 10% gain every year is unlikely for the next 10 years? Thanks. – sean717 Jan 29 at 3:36

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