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Email this12:19 am
August 5, 2014
Offline
I received an unusual email from State Bank of India Canada today that I just noticed and read. It is something I never saw before.
They are offering a loan against any GIC's we have with them. They don't specify any rate and the terms, conditions of it. Although they say their rates are competitive and it is flexible. The most we can borrow is 75% of the GIC.
The only benefits we can see about this is that we are not putting our home at risk and we are just borrowing against a future guaranteed investment that we know will have. It may also be easier, faster, less expensive than other financing options.
We are assuming this is for non-registered GIC's because RRSP's, TFSA's and other registered accounts can't be used for collateral or borrowing against.
If we were to ever do this, we would go in person to a branch to make sure everything is on the up and up.
I guess the sooner a GIC matures and there is only say 1 or 1.5 years left until maturity, it could make sense if the interest paid on the borrowed amount would not add up to too much.
We are in no way affiliated or associated with State Bank of India Canada. We are just GIC clients. We are in no way advising, suggesting to borrow against GIC's or borrow money for any reason.
12:54 am
October 21, 2013
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I suppose this is for people who locked in to a GIC and then thought better of it? A more profitable alternative to "cashable"? It's hard to imagine the rate would be so favourable that you would want to borrow this simply for re-investing. If so, surely they would have been keen to tell you in the first place.
I suppose the deduction they are referring to is discussed here, but I find the details somewhat confusing
http://www.cra-arc.gc.ca/tx/nd.....u-eng.html
One might be better off with a whole life insurance policy, and borrowing against that, if it is appropriately constructed. I just finished reading a book about how this works. I don't think it will add much to my personal situation so am not likely to pursue it. It's more useful, at least in theory, for younger people. It's a complicated manoeuvre, and I can't claim to know a lot about it. She says it takes a professional about a year to really learn the ins and outs. The book is The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future, by Pamela Yellen (Dallas, TX: BenBella Books, 2014). I got it from my public library. The author has a website, http://www.bankonyourself.com , through which one can get in touch with local experts and buy suitable policies. She warns strongly against buying garden-variety whole life policies, as they will not have the necessary riders. Apparently she has people in Canada as well as US who can set this up, and she is honest enough to admit that she gets a commission for referrals. I do know of people who did this kind of borrowing quite a few years ago when interest rates were very high because their policies were written with a much lower fixed rate of interest at which they could borrow any time during their lives. My hesitation is that I really have no idea how well this would work today, but it might be worth a look for someone who wants to investigate every possible conservative strategy. She makes an interesting historical point that back before investing in the stock market became a common retail activity, whole life insurance was what people bought instead, and it was a much safer investment in several ways. She says that they were very popular from 1920s to 1950s, but after that people were more likely to get into the stock market, for better or worse. She finds the market too risky. As a child of the '50s, I do remember that it was very common for parents to buy these policies for their children. My spouse still has one of those - a small policy but has been borrowed against with a profit. She says that in the 1950s, 30% of families had these policies.
As I said, I really can't say if this is a good strategy or not. One would have to ask a lot of questions of the advisor she sends you too. But I must admit, I did think of you, Jack, when I was reading this, and wondered if it would interest you, but I didn't want to appear to be pushing it, which I'm not. But, then, you have raised this question about State Bank of India, and borrowing against financial assets, and it now seems appropriate to at least mention it.
1:18 am
August 5, 2014
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Loonie, in my above post I removed the part afterwards that State Bank of India Canada stated that interest paid would be deductible for investments of borrowed funds. It was something I was probably thinking about but when I read over their email again, I realized it was not part of their email.
I know that money borrowed for investing purposes that pays dividends, interest, investment income, royalty income and some capital gains is income tax deductible. This has to be in non-registered accounts only.
I heard of universal policies and whole life insurance policies are not great because of high annual fees or premiums as the insurance industry calls them but I never really researched it.
Loonie, I did some calculations out of curiosity and found this to be interesting. My mortgage broker showed me a 10 year fixed rate mortgage special at 3.65% and then he showed me similar zero coupon government bond rates of 3.65%. He did this with a $10,000 example.
The $10,000 in 10 years totaled $14,357.82 and $10,000 money borrowed, principal and interest paid in 10 years totaled $11,935.20.
There is a net interest margin of $2,422.62 or 24.22% and $1,935.20 is income tax deductible. Loonie, by the way, the monthly payments is $99.46 per $10,000 in this case. It is fully paid off in 10 years and there is no risk of mortgage rates rising on money borrowed.
I just found this interesting that at the same fixed interest rate, there would be such a big difference. My mortgage broker was explaining using safe investments to borrow and invest but we decided to pass for now.
Once again, we are not affiliated or associated with any mortgage company, lender, financial institution. We are just clients of a mortgage company but not with the one above mentioned. We are not advising, suggesting anyone to borrow money to invest or borrow money in general.
4:22 am
October 21, 2013
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I'm afraid I didn't quite follow what you were saying about the mortgage broker, or what one would do with that information. It sounds complicated.
As for the whole life insurance, yes, it's fallen out of favour. The author addresses that, if anyone is interested to pursue it.
9:30 pm
April 6, 2013
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Loonie said
...
One might be better off with a whole life insurance policy, and borrowing against that, if it is appropriately constructed. I just finished reading a book about how this works. I don't think it will add much to my personal situation so am not likely to pursue it. It's more useful, at least in theory, for younger people. It's a complicated manoeuvre, and I can't claim to know a lot about it. She says it takes a professional about a year to really learn the ins and outs. The book is The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future, by Pamela Yellen (Dallas, TX: BenBella Books, 2014). I got it from my public library. The author has a website, http://www.bankonyourself.com , through which one can get in touch with local experts and buy suitable policies. She warns strongly against buying garden-variety whole life policies, as they will not have the necessary riders. Apparently she has people in Canada as well as US who can set this up, and she is honest enough to admit that she gets a commission for referrals. I do know of people who did this kind of borrowing quite a few years ago when interest rates were very high because their policies were written with a much lower fixed rate of interest at which they could borrow any time during their lives. My hesitation is that I really have no idea how well this would work today, but it might be worth a look for someone who wants to investigate every possible conservative strategy. She makes an interesting historical point that back before investing in the stock market became a common retail activity, whole life insurance was what people bought instead, and it was a much safer investment in several ways. She says that they were very popular from 1920s to 1950s, but after that people were more likely to get into the stock market, for better or worse. She finds the market too risky. As a child of the '50s, I do remember that it was very common for parents to buy these policies for their children. My spouse still has one of those - a small policy but has been borrowed against with a profit. She says that in the 1950s, 30% of families had these policies.
As I said, I really can't say if this is a good strategy or not. One would have to ask a lot of questions of the advisor she sends you too. But I must admit, I did think of you, Jack, when I was reading this, and wondered if it would interest you, but I didn't want to appear to be pushing it, which I'm not. But, then, you have raised this question about State Bank of India, and borrowing against financial assets, and it now seems appropriate to at least mention it.
Doesn't look like a very good strategy to me. I had a look at the website. Not a single mention of the rate of return for the author's strategy. That is suspicious to me. It turns out that the rate of return is quite low.
On the page The Magic of Good Bank On Yourself Plan Design, the author gives an example of a policy where one pays $12,000 a year for 50 years. After 50 years, the policy is paid up and will pay out $2,027,422 at death of which $1,668,710 is cash value.
50 Years of $12,000/year, returning a payout at death of $2,027,422, means a 4.33% compounded annual return. Of that death payout, $1,668,710 is cash value which means a 3.73% compounded annual return based on cash value.
There's this warning on the page that nothing is guaranteed by such policies:
Annual Cash Value Increase, Total Cash Value and Death Benefits are based on the dividend scale as of March 2013. Dividends can change and are not guaranteed, however the companies generally recommended by Bank On Yourself Authorized Advisors have consistently paid dividends every year for more than 100 years. Policies from different companies may vary.
These sound like participating whole life policies where one pays extra to receive non-guaranteed dividends based on the performance of the insurance company.
The comparison with the S&P 500 is also not fully honest. The claim is that the S&P 500 closed 14% higher on February 3, 2014 than it did on March 24, 2000. During that 14 year period, there was 36% inflation.
That comparison ignores dividends on the S&P 500. On March 24, 2000, the S&P 500 Total Return index closed at 2,107.28. On February 3, 2014, the total return index closed at 3,127.87 for a dividend-included gain of 48.4% over the 14 year period, which includes the 2008 crash.
To me, the author seems to be more of a non-licensed cheerleader for insurance agents than an independent advisor.
10:29 pm
April 6, 2013
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Jack Manning said
...
Loonie, I did some calculations out of curiosity and found this to be interesting. My mortgage broker showed me a 10 year fixed rate mortgage special at 3.65% and then he showed me similar zero coupon government bond rates of 3.65%. He did this with a $10,000 example.The $10,000 in 10 years totaled $14,357.82 and $10,000 money borrowed, principal and interest paid in 10 years totaled $11,935.20.
There is a net interest margin of $2,422.62 or 24.22% and $1,935.20 is income tax deductible. Loonie, by the way, the monthly payments is $99.46 per $10,000 in this case. It is fully paid off in 10 years and there is no risk of mortgage rates rising on money borrowed.
I just found this interesting that at the same fixed interest rate, there would be such a big difference. My mortgage broker was explaining using safe investments to borrow and invest but we decided to pass for now.
....
About $1,899.38 of the net $2,422.62 interest margin is reduced interest paid on the loan as a result of the the $10,000 of principal repayments during the ten years of the loan.
One is just $2,422.62 - $1,899.38 = $523.24 ahead of someone who invested the same stream of principal repayments at the same interest rate over the ten years.
10:53 pm
August 5, 2014
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Norman1, I have no idea where you are getting your numbers from? Please show me what you are talking about.
11:06 pm
April 6, 2013
Offline
Jack, each $99.46 monthly payment on the $10,000 mortgage loan is more than the interest each month on the loan. Consequently, the balance on the loan drops every month except on each 6th month when six months of accrued interest is added to the balance:
Month StartBalance AccruedInterest Payment EndBalance
1 $10,000.00 $30.41667 -$99.46 $9,900.54
2 $9,900.54 $30.11414 -$99.46 $9,801.08
3 $9,801.08 $29.81161 -$99.46 $9,701.62
4 $9,701.62 $29.50909 -$99.46 $9,602.16
5 $9,602.16 $29.20656 -$99.46 $9,502.70
6 $9,502.70 $28.90403 -$99.46 $9,581.20
7 $9,581.20 $29.14281 -$99.46 $9,481.74
8 $9,481.74 $28.84028 -$99.46 $9,382.27
9 $9,382.27 $28.53775 -$99.46 $9,282.81
10 $9,282.81 $28.23523 -$99.46 $9,183.35
11 $9,183.35 $27.93270 -$99.46 $9,083.89
12 $9,083.89 $27.63017 -$99.46 $9,154.75
13 $9,154.75 $27.84570 -$99.46 $9,055.29
14 $9,055.29 $27.54317 -$99.46 $8,955.83
15 $8,955.83 $27.24064 -$99.46 $8,856.37
16 $8,856.37 $26.93812 -$99.46 $8,756.91
17 $8,756.91 $26.63559 -$99.46 $8,657.45
18 $8,657.45 $26.33306 -$99.46 $8,720.52
19 $8,720.52 $26.52492 -$99.46 $8,621.06
20 $8,621.06 $26.22239 -$99.46 $8,521.60
21 $8,521.60 $25.91986 -$99.46 $8,422.14
22 $8,422.14 $25.61734 -$99.46 $8,322.68
23 $8,322.68 $25.31481 -$99.46 $8,223.22
24 $8,223.22 $25.01228 -$99.46 $8,278.37
25 $8,278.37 $25.18003 -$99.46 $8,178.91
26 $8,178.91 $24.87751 -$99.46 $8,079.45
27 $8,079.45 $24.57498 -$99.46 $7,979.98
28 $7,979.98 $24.27245 -$99.46 $7,880.52
29 $7,880.52 $23.96993 -$99.46 $7,781.06
30 $7,781.06 $23.66740 -$99.46 $7,828.14
31 $7,828.14 $23.81061 -$99.46 $7,728.68
32 $7,728.68 $23.50808 -$99.46 $7,629.22
33 $7,629.22 $23.20555 -$99.46 $7,529.76
34 $7,529.76 $22.90302 -$99.46 $7,430.30
35 $7,430.30 $22.60050 -$99.46 $7,330.84
36 $7,330.84 $22.29797 -$99.46 $7,369.70
37 $7,369.70 $22.41618 -$99.46 $7,270.24
38 $7,270.24 $22.11366 -$99.46 $7,170.78
39 $7,170.78 $21.81113 -$99.46 $7,071.32
40 $7,071.32 $21.50860 -$99.46 $6,971.86
41 $6,971.86 $21.20608 -$99.46 $6,872.40
42 $6,872.40 $20.90355 -$99.46 $6,902.90
43 $6,902.90 $20.99632 -$99.46 $6,803.44
44 $6,803.44 $20.69379 -$99.46 $6,703.98
45 $6,703.98 $20.39126 -$99.46 $6,604.52
46 $6,604.52 $20.08874 -$99.46 $6,505.05
47 $6,505.05 $19.78621 -$99.46 $6,405.59
48 $6,405.59 $19.48368 -$99.46 $6,427.57
49 $6,427.57 $19.55053 -$99.46 $6,328.11
50 $6,328.11 $19.24801 -$99.46 $6,228.65
51 $6,228.65 $18.94548 -$99.46 $6,129.19
52 $6,129.19 $18.64295 -$99.46 $6,029.73
53 $6,029.73 $18.34043 -$99.46 $5,930.27
54 $5,930.27 $18.03790 -$99.46 $5,943.57
55 $5,943.57 $18.07837 -$99.46 $5,844.11
56 $5,844.11 $17.77584 -$99.46 $5,744.65
57 $5,744.65 $17.47331 -$99.46 $5,645.19
58 $5,645.19 $17.17079 -$99.46 $5,545.73
59 $5,545.73 $16.86826 -$99.46 $5,446.27
60 $5,446.27 $16.56573 -$99.46 $5,450.74
61 $5,450.74 $16.57933 -$99.46 $5,351.28
62 $5,351.28 $16.27681 -$99.46 $5,251.82
63 $5,251.82 $15.97428 -$99.46 $5,152.36
64 $5,152.36 $15.67175 -$99.46 $5,052.90
65 $5,052.90 $15.36923 -$99.46 $4,953.44
66 $4,953.44 $15.06670 -$99.46 $4,948.91
67 $4,948.91 $15.05294 -$99.46 $4,849.45
68 $4,849.45 $14.75042 -$99.46 $4,749.99
69 $4,749.99 $14.44789 -$99.46 $4,650.53
70 $4,650.53 $14.14536 -$99.46 $4,551.07
71 $4,551.07 $13.84283 -$99.46 $4,451.61
72 $4,451.61 $13.54031 -$99.46 $4,437.93
73 $4,437.93 $13.49869 -$99.46 $4,338.47
74 $4,338.47 $13.19617 -$99.46 $4,239.01
75 $4,239.01 $12.89364 -$99.46 $4,139.54
76 $4,139.54 $12.59111 -$99.46 $4,040.08
77 $4,040.08 $12.28859 -$99.46 $3,940.62
78 $3,940.62 $11.98606 -$99.46 $3,917.62
79 $3,917.62 $11.91608 -$99.46 $3,818.15
80 $3,818.15 $11.61355 -$99.46 $3,718.69
81 $3,718.69 $11.31103 -$99.46 $3,619.23
82 $3,619.23 $11.00850 -$99.46 $3,519.77
83 $3,519.77 $10.70597 -$99.46 $3,420.31
84 $3,420.31 $10.40345 -$99.46 $3,387.81
85 $3,387.81 $10.30459 -$99.46 $3,288.35
86 $3,288.35 $10.00206 -$99.46 $3,188.89
87 $3,188.89 $9.69953 -$99.46 $3,089.43
88 $3,089.43 $9.39700 -$99.46 $2,989.97
89 $2,989.97 $9.09448 -$99.46 $2,890.50
90 $2,890.50 $8.79195 -$99.46 $2,848.33
91 $2,848.33 $8.66368 -$99.46 $2,748.87
92 $2,748.87 $8.36115 -$99.46 $2,649.41
93 $2,649.41 $8.05863 -$99.46 $2,549.95
94 $2,549.95 $7.75610 -$99.46 $2,450.49
95 $2,450.49 $7.45357 -$99.46 $2,351.03
96 $2,351.03 $7.15105 -$99.46 $2,299.01
97 $2,299.01 $6.99283 -$99.46 $2,199.55
98 $2,199.55 $6.69030 -$99.46 $2,100.09
99 $2,100.09 $6.38777 -$99.46 $2,000.63
100 $2,000.63 $6.08525 -$99.46 $1,901.17
101 $1,901.17 $5.78272 -$99.46 $1,801.71
102 $1,801.71 $5.48019 -$99.46 $1,739.67
103 $1,739.67 $5.29148 -$99.46 $1,640.20
104 $1,640.20 $4.98896 -$99.46 $1,540.74
105 $1,540.74 $4.68643 -$99.46 $1,441.28
106 $1,441.28 $4.38390 -$99.46 $1,341.82
107 $1,341.82 $4.08137 -$99.46 $1,242.36
108 $1,242.36 $3.77885 -$99.46 $1,170.11
109 $1,170.11 $3.55909 -$99.46 $1,070.65
110 $1,070.65 $3.25656 -$99.46 $971.19
111 $971.19 $2.95403 -$99.46 $871.73
112 $871.73 $2.65151 -$99.46 $772.27
113 $772.27 $2.34898 -$99.46 $672.81
114 $672.81 $2.04645 -$99.46 $590.16
115 $590.16 $1.79508 -$99.46 $490.70
116 $490.70 $1.49255 -$99.46 $391.24
117 $391.24 $1.19002 -$99.46 $291.78
118 $291.78 $0.88750 -$99.46 $192.32
119 $192.32 $0.58497 -$99.46 $92.86
120 $92.86 $0.28244 -$99.46 -$0.37
11:12 pm
August 5, 2014
Offline
I don't understand why you said there is only a $523.24 profit or total interest earned when the total interest paid on the $10,000 loan is $1,935.20 compared to $4,357.82 interest earned on $10,000 invested?
11:16 pm
October 21, 2013
Offline
thanks for your comments, Norman.
Just FYI, in the book, the author does point out repeatedly that dividend rates are not guaranteed, and only points to the fact that they have always paid some kind of dividend for the last 160 yrs., but nowhere does she give a chart of these rates over the 160 years (at least not that I recall), which I would like to have seen. She also says at one point that, as she goes to press, dividend rates were as low as they have EVER been. So, she's not exactly hiding the lowish returns, which do not seem to offer any immunity from other kinds of low returns. Her main point in that regard is that it's a safer investment. I worked out some of her figures as well, and came to the 3 to 4% range, but I was unable to determine how that would work out in the current climate and Cdn context and wasn't sure if I'd understood it correctly.
I felt the ability to borrow might be one of the more attractive features, but not to me as I don't need to borrow.
Interesting point about the S&P.
She isn't an advisor per se. She presents herself as someone who had to find things out the hard way. She then refers people on to life insurance advisors whom she considers acceptable.
Like everything, it might be suitable for some people but probably not for most.
Thanks again for checking it out for us.
11:50 pm
August 5, 2014
Offline
Loonie, simply what I was saying is in the above example is money borrowed and paid at the same rate compared to compound interest at the same rate had such a big difference.
I have to look more in depth into this but if this is accurate, the higher the fixed interest rate would actually be more of a benefit compared to paying at the same higher interest rate. For example, $10,000 for 10 years at 5.00% compounded is better than at 3.65%, $16,386.16 versus $14,357.82
Loonie, I think you would agree we all know the magic of compound interest over many years.
11:52 pm
October 21, 2013
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I still don't follow, don't understand what you are proposing, but don't worry. I'm not planning on borrowing anyway.
11:55 pm
August 5, 2014
Offline
Loonie, it is the same concept such as paying off your mortgage versus contributing to your RRSP. Maybe this concept is not really understood by many Canadians which simply do both or only one or the other.
12:06 am
August 5, 2014
Offline
Loonie, this concept may also make sense if zero coupon bond rates and bond rates are at historically high levels say 7%, 8%, 9% and there is a great possibility that they will fall for years as we experienced for decades now.
Loonie, imagine you could of borrowed $200,000 as rates fell year after year, even in 5 year fixed rate terms and invested that $200,000 at 9.5% longer term zero coupon bonds say 20 years now.
The $200,000 would be worth $1,228,332. Let us say you averaged 6% on the mortgage after 20 years with falling mortgage rates or line of credit on $200,000 and paid it all off.
It would of cost you much less, $142,000 in total interest over 20 years versus $1,028,332 total interest earned from your 9.50% zero coupon bond investment.
I know this is an extreme case but it just shows the major difference between the two interest amounts earned and paid.
12:12 am
October 21, 2013
Offline
I see. But there's no way to predict the future, really. We only know in hindsight what we should have done.
Does this apply to anything you would consider doing at this time?
12:22 am
August 5, 2014
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Loonie, we do know historically what interest rates, bond rates are for probably the last 90, 100 years.
Also, we know that interest rates, bond rates that are at certain levels like 7% and higher are not that high for many years compared to when they are below 7% like the last 16 years of so.
We are in a low interest rate time now but so is borrowing money so the benefit is not as great as when rates were 5% and higher so that probably is a better time to lock in and possibly use this concept, strategy but I am in no way advocating, advising borrowing to invest.
It maybe something to look at and consider. Loonie, like anything else in life, the more financial resources one has, the better this would likely work for them.
4:58 pm
April 6, 2013
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Jack Manning said
I don't understand why you said there is only a $523.24 profit or total interest earned when the total interest paid on the $10,000 loan is $1,935.20 compared to $4,357.82 interest earned on $10,000 invested?
That's not what I intended to say. I intended to say that one would be have just $523.24 more in earned interest than someone who had invested the principal portion of each monthly loan payment, at the same 3.65% interest rate, over the same ten years.
5:48 pm
April 6, 2013
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Loonie said
thanks for your comments, Norman.
Just FYI, in the book, the author does point out repeatedly that dividend rates are not guaranteed, and only points to the fact that they have always paid some kind of dividend for the last 160 yrs., but nowhere does she give a chart of these rates over the 160 years (at least not that I recall), which I would like to have seen.
...
You're welcome, Loonie.
I'm cynical and don't feel that the omission of the rate chart was accidental. In this day of computers and spreadsheets, it is is quite easy and inexpensive to create such a chart.
My suspicion is that that the chart of such policy dividends would show the dividends paid each year jumping all over the place with some years near zero. A friend had one of those participating life insurance policies. Some years, there was no bill for the annual premium payment as the dividend covered the premium payment. But, most years he had to send in money for the premium. That participating feature is not free either. There's an extra charge for it compared to the same policy without the feature.
I think one can get 3% to 4% over the long term by investing in zero-risk GIC's. It doesn't make sense to me to accept the same kind of return for a participating life insurance policy where the dividends depend on how well the insurance company does.
9:24 pm
August 5, 2014
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Norman1, I don't see what your point is anyway of comparing just the principal and interest portion of the mortgage payment. The whole point of borrowing money and investing money in the first place is so you know what your interest rate is fixed for a certain period of time.
If you were to invest any money, no matter what amount it is, on a monthly basis because you did not have the money upfront, you would be at the mercy of what interest rates would be.
This might make sense in a lower interest rate environment when rates would likely rise but this is the exactly the opposite of what happened since 2007.
10:46 pm
August 5, 2014
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Loonie and Norman1, there are government zero coupon bonds today from 3.00% to as high as 3.80%. There are a few non-registered GIC's available that are 3.00% but not much. Duca C.U. and Caisse Financial Group are two that come to mind.
Loonie, another GIC of ours came due at Duca C.U. and we just put it for 7 years at 3.00%. The $1,149.37 interest on our $5,000 is satisfactory today as interest rates are stuck again in the mud with the Bank of Canada leaving rates at 1% for 4 years now.
Please write your comments in the forum.