Investment Loans - Leveraging  

Investment loans are suitable for individuals that have maxed out their RRSP contributions but would like additional tax relief.  Investment loans are also suitable for those that wish to invest but do not have the funds available right away.

We all know the wisdom of borrowing to invest not to consume. There are two types of debts individuals have, good debt and bad debt. Good debt is when one borrows money to buy appreciating assets such as a house, business, investment property, valuables and collectibles and investments. 

The biggest advantage of having investments in a diversified portfolio of equities versus other investments is liquidity. Investments in equities also offer the greatest potential appreciation over the long term historically outperforming all other investments including real estate. We are not suggesting that one should not own property on the contrary we encourage all our clients to buy a house and get a mortgage if needed. We are suggesting that one should be investing in equities to increase their net worth and pay off their mortgage faster. 

Bad debts include credit card debt, high interest credit lines and high interest consumer loans. Canadians are now one of the most indebted nations in the world. This borrowing frenzy was made possible with low interest rates. Saving rates of Canadians have declined substantially. The media has published on this issue and the federal government tightened up lending requirements for mortgages. A mortgage on a property is also a leveraged loan the value of real estate fluctuates just like any other investment. 

Investment loans are tax deductible. B2B Bank offers two types of investment loans with margin calls and without margin calls. We recommend loans without margin calls, you can borrow an amount to suite your personal risk tolerance. Stone-Hedge Financial Group Inc. only deals with world class money managers that have proven track records and expertise. We do not deal with speculative investments such as penny stocks, illiquid and high risk tax shelters, or promoters of real estate syndicates and mortgage pools. We only deal with segregated funds offered by insurance companies. Stone-Hedge Financial Group Inc. has additional criteria to determine if one is eligible for an investment loan, we do not offer investment loans to senior citizens on low fixed incomes, individuals with low or unstable incomes, the unemployed, or individuals with high levels of personal debt.

Stone-Hedge Financial Group Inc.

is an authorized distributor of B2B Bank Investment Loans

FAQ:

What is an investment loan? 

An investment loan is a loan that is used to purchase segregated funds. The purchased funds (or in the case of segregated fund loans, the annuity contracts) are held as collateral which secures the loan, much the same way as a house is used as security for a mortgage loan. With an investment loan, the lender holds the funds on behalf of the borrower until such time as the loan is repaid in full.

What type of individual is best suited for an investment loan?

Generally, the ideal loan candidate has a higher risk tolerance combined with an appetite to increase their exposure to the market. They should have a good credit history, their debt levels under control and be committed to a long-term investment strategy. Of course, the decision to apply for an investment loan is one that should be made by an investor after consulting with a financial advisor.

What are the risks of borrowing to invest?

A leveraged purchase of segregated funds involves a greater degree of risk than a similar purchase using cash resources only. The reason for this is that if the value of the investment falls, the borrower suffers a loss of value beyond what they may have experienced had they invested with only their own money.

For example, on a 2 For 1 Loan where investors pledge $50,000 and borrow another $100,000, if the investment drops in value by 10%, the numbers would look like this:

On the investors' portion of the investment, $50,000 less 10% = $45,000, they've lost (so far) $5,000. Had they ONLY invested with their own money, their loss would be fixed at $5,000. However, when you include the investment from borrowed funds, $100,000 less 10% = $90,000, an ADDITIONAL $10,000 is lost.

Borrowers are also responsible for loan payments irrespective of the performance of their investments. In other words, should an investment drop in value, not only does the borrower lose on the investment, but they are also still required to repay the loan in full.

What types of loans are available through B2B Bank's Investment Loan Program?

There are 4 different loan products offered through our investment loan program: 100%, 3 For 1, 2 For 1 and 1 For 1. Each comes with either a no margin call or a lower-priced margin call feature. Each loan product also offers a choice of monthly payment type: interest only or principal and interest.

Are there any fees associated with B2B Bank investment loans?

There are no annual or administration fees associated with our investment loans. However, for segregated funds, borrowers are charged the applicable provincial fee to register, renew and/or discharge (if applicable) a security interest in the segregated fund, under applicable personal property security legislation. The initial registration fee will be added to the borrower's first scheduled payment and any future cost for renewal or discharge will be charged to the borrower at that time. B2B Bank charges a $50 fee for any returned items. 

Underwriting Criteria 

What underwriting criteria does B2B Bank use when deciding to lend to an individual?

Because every individual's situation is unique, we take a holistic approach to underwriting. Some of the key criteria we consider include:

• Total debt service ratio (TDSR): ): the applicant's regularly recurring monthly debt payments (including the new loan payment) should be less than or equal to 40% of their gross monthly income.

• Net worth: the applicant's tangible net worth is calculated by subtracting their total outstanding liabilities (debt obligations) from the total of their verifiable assets. For 100% investment loans up to $100,000, net worth should be less than or equal to 1 x the loan amount. For 100% investment loans between $100,000 and $250,000, net worth should be greater than 1.5 x the loan amount. For 100% investment loans greater than $250,000, net worth should be greater than 2 x the loan amount.

• Credit history: all obligations must be up-to-date and paid as agreed – no bankruptcies, collections or judgments.

TDSR for 100% Loans should not be greater than 40%. TDSR will be calculated for 3 For 1, 2 For 1 and 1 For 1 Loans but will not solely determine credit decision. In all cases, additional documentation may be requested at the discretion of B2B Bank.

In addition to income and net worth, what else should be considered when assessing whether a client will qualify for a loan?

To help determine whether you or your client is "credit worthy" consider:

• whether they have established a file at the credit bureau;

• if they regularly pay their bills on time;

• if they can comfortably afford their obligations with money left over after meeting their living expense. 

The Application Process

How can I obtain an Investment Loan Application?

Contact Stone-Hedge Financial Group Inc. we will assist you with this process.

In addition to the Investment Loan Application are there any other documents that B2B Bank requires?

B2B Bank requires the following:

• Void cheque from the client's personal account.

• Letter of Direction (included with the loan application). This form is required only if paying out a loan at another financial institution.

• Pledge Letter (included with the loan application) and/or cheque payable to B2B Bank, B2B Bank Financial Services Inc., B2B Bank Securities Services Inc. or B2B Bank Intermediary Services Inc. (whichever is applicable). The Pledge Letter is required if paying out a loan at another financial institution, or if you are is pledging collateral on a 3 For 1, 2 For 1 or 1 For 1 Loan.

• If pledging cash or eligible fund collateral (not related to a payout), these transactions must be added to a new or existing investment account prior to the funding of the loan. When opening a new investment account for the purposes of pledging cash or eligible fund collateral prior to the funding of the loan, a complete investment account application must be submitted to B2B Bank Dealer Services.

For Distribution Alliance segregated fund loans, also include:

• Notice of Investments (included with the Distribution Alliance loan application) and/or cheque payable to B2B Bank. The Notice of Investments is required if paying out a loan at another financial institution, or if you are is pledging collateral on a 3 For 1, 2 For 1 or 1 For 1 Loan.

• Assignment, Hypothecation, Acknowledgement and Direction (included with the Distribution Alliance loan application).

• Original application to the insurance company. 

For all 100% Loans greater than $100,000 (upon request for 100% Loans up to and including $100,000 and for 3 For 1, 2 For 1 and 1 For 1 Loans):

• • Proof of assets such as statements/assessments.

  • Proof of income details are as follows:

    • Salaried income: recent pay stub or Notice of Assessment.

    • Commissioned income: last 2 years' Notice of Assessment.

    • Self-employed income: last 2 years' Notice of Assessment and Financial Statements.

When will I be notified that my loan has been approved or declined?

B2B Bank will email and/or fax approved/declined/delayed notification to your segregated fund advisor typically within one business day upon receipt of the application. Delays are usually the result of missing information or if further clarification is required. 

Funding & Investment Purchases

When will the loan be funded? 

The loan will be funded typically within one business day upon receipt and verification of the original loan documentation.

How will segregated fund investments be purchased? 

For segregated funds investment loans, funded proceeds will be advanced into the borrower(s) B2B Bank new investment account, where B2B Bank will place the trades according to the instructions on the original supporting insurance application.

Which segregated fund units can be purchased with borrowed money?

B2B Bank currently lends on a majority of Canadian investment industry assets. We also regularly review the criteria that determine qualifying collateral for each of our loan types. Retail Venture Capital, Alternative Strategies and Specialty (including Principal Protected Notes) do not qualify for any of our products. Please be aware that all funds must be valued in Canadian currency to be eligible. In the case of segregated funds, a Distribution Alliance agreement must also be in place with the life insurance company.

Are GMWB segregated funds eligible?

Yes, B2B Bank offers a GMWB segregated fund investment loan. However, the GMBW funds selected for pledge or purchase must meet B2B Bank's collateral eligibility criteria and a Distribution Alliance agreement must be in place with the life insurance company.

Loan Payments

Is there any particular day of the month that loan payments must be made?

Not at all. We try to accommodate all of your needs. As such, borrowers may select any day of the month – from the 1st to the 28th – whatever is most convenient for them. Flexible payment dates can be helpful to you when it comes to managing their monthly cash flows.

Can a borrower make lump sum payments or increase their monthly payment amounts? 

Borrowers can make lump sum payments whenever they choose at no additional charge or penalty. Should they wish to increase their monthly loan payment amount, written instructions directing us to increase their payment must be provided on B2B Bank's Pre-authorized Debit Agreement form. Payment decrease requests are considered on a case-by-case basis.

Are monthly loan payments affected if there is a change in the Prime Rate?

There are typically no changes made to the loan payment amount during the year unless requested by the borrower. This is a real benefit for those managing their cash flow on a monthly basis. Interest only payments may be adjusted at least annually to reflect changes in the outstanding principal of the loan and the Prime Rate. Although changes to interest only payment amounts typically occur in January and usually remain fixed for the entire calendar year, we reserve the right to adjust payments at any time if the Prime Rate changes significantly.

Can borrowers pay off their investment loan at any time?

Yes, they can. To pay off a loan, the account holder can send a cheque payable to B2B Bank for the full amount outstanding, or direct us to redeem the security held as collateral for the loan. All loans can be paid out at any time without any additional charge or penalty from B2B Bank.

What happens to the segregated fund collateral once the loan is paid in full? 

If the borrower pays the loan from their own resources, the collateral held as security by B2B Bank will be re-registered into the client's name. If the borrower chooses to pay the loan by redeeming the funds held as security by B2B Bank, any surplus that remains after the trades have settled will be sent by cheque to the borrower. If there is a deficiency balance, it will be necessary that the borrower make arrangements to pay it in full. 

Margin Warning / Call

My client received a margin warning. What do I need to do?

You do not need to take any action when their account is in a margin warning position; notices are sent to alert you and your client that the loan-to-value ratio of the investment loan has risen and that if the trend continues, it may result in a margin call. When a margin warning is received, you can use it as an opportunity to discuss potential next steps with your segregated fund advisor.

What happens in a margin call situation?

You will receive notification if your client's loan reaches a margin call. At this point, you must take action to reduce the loan-to-value ratio. You have a couple of options to remedy the situation: you may either provide B2B Bank with additional segregated fund collateral, you can pay down the loan balance by sending a cheque payable to B2B Bank or you can convert to a 2-year fixed term (not applicable for Quebec residents).

Loan Account Statements

Will the borrower receive any reports on the status of their loan account?

B2B Bank is committed to keeping advisors and their clients informed of all account transactions. Clients will receive quarterly loan statements and year-end investment loan statements (including interest expense totals) in mid-January.

Source: B2B Bank

Contact Us To Apply for a B2B Bank Investment Loan

B2B Bank is a trademark used under license.This information is provided to you from the B2B Bank website. While every effort is taken to ensure that all the information is accurate and up-to-date, in case of discrepancies between the content on the B2B Bank website and the content published on this website, the original information on the B2B Bank website shall prevail.

The information provided on this web site is intended for general information only. It should not be construed as legal, accounting, tax or specific insurance and investment advice. Clients should consult a professional advisor concerning their situations and any specific insurance and investment matters. While reasonable steps have been taken to ensure that this information was accurate as of the date hereof, Stone-Hedge Financial Group Inc. and its affiliates make no representation or warranty as to the accuracy of this information and assume no responsibility for reliance upon it.