GIC's and Borrowing | Page 2 | GIC discussions | Discussion forum

Jack Manning said
Norman1, I don't see what your point is anyway of comparing just the principal and interest portion of the mortgage payment.
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The comparison explains why one ends up with more interest earned than interest paid, eventhough the interest rate on the strip bond and on the loan are both 3.65% over the identical ten-year period.

One would earn 3.65% on the strip bond balance that grows from $10,000 to $14,357.82. At the same time, one is charged 3.65% interest on a loan balance that declines from $10,000 to zero.

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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.
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For the certainty of the loan and bond interest rates, you've assumed the risk of being able to make all 120 of those monthly payments on time. The example given was for $10,000. But, the mortgage broker is not hoping you'll agree to a $99.46/month mortgage of just $10,000. The broker is hoping you'll bite and go for a $100,000 ($994.61/month) or $150,000 mortgage ($1,491.91/month).

For me, I would prefer to just invest the $99.46/month myself without a rate commitment. If I get around 2% over the next ten years, I would end up with about $13,200, instead of $14,357.82, for not commiting to the $99.46/month.

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.

For sure, no financial institution will commit to an interest rate for monthly investments when the investor does not commit to a certain number of monthly investments.

Didn't Korea Exchange Bank of Canada seem to offer 3.1% for a commitment of 60 monthly investments?

Loonie said
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.  

If you had to read a book about this product to invest, most likely you are missing some info that is not in your interest 🙂

The gambling system is made complicated so the house has a better chance.