Approval is a credit decision about you, not an opinion about the strategy. Four questions decide whether an investment loan works — deductibility in your hands, the cost of what holds the money, whether you can service it through a bad decade, and how you unwind — and nobody in the loan transaction is paid to answer any of them.
An investment loan is one of the few strategies in Canadian personal finance where the paperwork is easy and the decision is hard.
The paperwork is easy because lenders have been writing these for decades. If you have the net worth and the cash flow, an application takes an afternoon. The decision is hard because everything that determines whether the loan works — what you hold with the money, whether the interest is deductible in your hands, what you do in the third bad year — sits entirely outside what anyone adjudicates.
That gap is the whole subject of this article.
Two numbers govern approval, and it is worth being precise about them because they are often described loosely.
Net worth. Yours generally has to be at least twice the loan amount.
Debt service. Your total debt service ratio has to stay under 40% after the interest on the loan you are applying for is counted — not before. This trips people up: a ratio that looks comfortable today can fail once the new interest is stacked on.
Both tests exist for one reason. The loan is repayable regardless of how the investment performs. So approval turns on your ability to keep paying interest through a bad market, not on your expected return.
Which tells you something important about what approval means. It is a credit decision about you. It is not an opinion about the strategy. A lender that approves you has concluded you can service the debt. It has not concluded that borrowing to invest is right for your situation, that the fund you picked is a sensible place for the money, or that you will still be comfortable when the account is down 30%.
Nobody in that transaction is paid to have that opinion. That is not a criticism of banks — credit adjudication is their job and they do it well. It is a description of scope.
Interest on money borrowed to earn investment income is generally deductible in Canada. That word "generally" is carrying weight.
Deductibility depends on the use of the funds and on tracing that use cleanly. It can be compromised by how the account is structured, by what the investment actually pays, and by mixing borrowed and unborrowed money in one place. The deduction is also worth wildly different amounts to different people — at a 42% marginal rate a 5.45% loan costs about 3.16% after tax; at a 25% marginal rate the same loan costs about 4.09%.
Nobody at the loan desk asks what your marginal rate is. It is the single number that most changes whether this is worth doing.
This is the variable that decides the outcome, and it is the one most often waved past.
Borrowing at 5.45% and earning 7% sounds like a 1.55% spread. It is not, because the fee on the investment comes out first. A product with a 2.5% management expense ratio turns that 7% into 4.5% before you have paid a dollar of interest. Every percentage point of fee raises the return you need to break even by a full point.
The honest break-even on a leveraged position is not the after-tax interest rate. It is the after-tax interest rate plus everything the investment costs to own. On our own numbers that break-even sits closer to 4.1% than to the 3.16% the tax-adjusted interest suggests — and clients are routinely shown the 3.16%.
Most conversations about leverage risk are about net worth: what if the account falls?
The question that actually ends leveraged positions is narrower. Can you keep paying the interest, without changing how you live, through several bad years in a row? People do not unwind at the bottom because their net worth fell. They unwind because the payment became uncomfortable at the same moment the statement looked frightening.
That is a cash-flow question and it is answerable in advance, in writing, before anyone borrows anything. It requires modelling a market that does not recover for a while, which is precisely the scenario nobody puts in a proposal.
Almost every leveraged plan is built with an entry and no exit. What triggers paying it down? What happens at retirement, when the income that serviced the interest stops? What happens on death, and does the estate inherit a position it cannot service?
A loan has no opinion about any of this. It just sits there compounding until somebody makes a decision, and the decision usually gets made under pressure.
Three things, stated plainly.
We put the affordability test in writing before the amount is discussed. Not "how much can you get approved for" but "how much can you carry through a bad market without changing your life". The second number is usually smaller, and it is the one we size the loan from.
We are not neutral about borrowing to the edge of what you can genuinely carry — if the structure holds up under a stress test, using it fully is what the strategy is for. What we will not do is arrive at that number by working backwards from a loan size.
We model the cost of ownership, not just the interest rate. The fee on whatever holds the money is the main lever on the outcome, so it gets priced explicitly and the break-even is stated as a number you can check.
We write down what would make us unwind it. Before it starts. So the decision to exit is made in a calm room instead of a frightening one.
Any advisor will say they are objective. Here is a cheaper way to test it than taking our word: our investment loan calculator will show the loan losing, and the shareholder borrowing calculator will show a strategy collapsing before life expectancy if the numbers say so. Both are on this site. Neither is configured to flatter the answer we sell.
If a projection cannot produce a bad outcome, it is not a projection.
This matters more than it usually gets stated, so here it is directly.
We hold LLQP licensing across five provinces — life insurance and segregated funds — carry errors-and-omissions coverage, and hold a FundServ code. That is the basis on which we can recommend and place insurance and segregated fund contracts.
We are not securities-licensed. We do not select individual stocks, and nothing here is a recommendation to buy or sell a security. Where the strategy involves holdings outside our licence, our role is the structure, the tax consequence and the cash-flow modelling — not the security selection.
We are not accountants. We model what a strategy does to your tax position and we put those numbers in writing so your accountant can act on them or challenge them. Filing and tax opinions stay with your CPA, and we would rather you have one.
Being explicit about the edges of a licence is not a disclaimer. It is the difference between an advisor and a salesperson, and it is checkable — our licence details are published on our credentials page.
A bank can tell you whether you qualify. A discount platform can tell you what a fund costs. Neither can tell you whether this belongs in your plan, what it does to your tax position, whether you can carry it through a bad decade, or when to take it off.
Those are the questions that decide whether an investment loan is the best move you make this decade or the one you regret. They are also the only part of this that is actually hard.
If you want those four questions answered on your own numbers — including the possibility that the answer is no — book a 15-minute call. If the honest answer is that leverage does not belong in your situation, we will say so, and that is a useful outcome too.
Rates and lending terms referenced here are current as of writing, set by the lender at approval, and move with the market. This article describes mechanics and is not tax or investment advice. Your outcome depends on your own circumstances and tax position.