Dennis Colpitts could pay down the mortgage on his house in western Canada early if he wanted. He’s investing in the stock market instead -- and in some cases borrowing to do so.
With a mortgage rate of 2.35 percent, Colpitts said it makes more sense to put his money into stocks or other investments that hold the potential for higher gains. He primarily invests in exchange-traded funds, including through a margin account, which allows him to borrow money from his broker to buy securities.
“I could liquidate all my stocks and ETFs and put them into my mortgage, but I don’t,” said Colpitts, 39, a technology consultant who lives with his wife and two children in Calgary. “I keep them with the hope of getting my 6 or 7 percent return.”
Canadians like Colpitts are borrowing to invest at the highest level since at least 2000, racking up more than C$19 billion ($15 billion) on margin in January. That’s helped fuel a 37 percent surge in mutual-fund assets in the past two years and a 41 percent rise in ETF assets. The figures illustrate Canada’s rock-bottom interest rates aren’t only fueling house prices and consumer debt to record highs, they’re enticing people to leverage in financial markets.
“There is some strategic borrowing going on by Canadians,” Doug Porter, chief economist at Bank of Montreal, said in a phone interview from Toronto. “Some folks have relatively low-rate mortgages and are looking at the solid gains in equity markets, generous dividends and making a conscious decision to not pay down their debt when they could and instead using the funds to invest. Some are even borrowing to invest.”
Canadians borrowed C$19.2 billion against their brokerage accounts in January, near a peak of C$19.4 billion in September, according to figures from the Investment Industry Regulatory Organization of Canada. Investors surpassed the previous 2008 peak in 2013 and have been steadily increasing margin borrowing since.
“Over the last two years you’ve seen a resurgence in stock trading and investment and an increase in margin loans extended by dealers to clients to buy equity,” Ian Russell, president of the Investment Industry Association of Canada, said in a phone interview.
Mutual-fund assets under management reached C$1.22 trillion in the two years to February, up from C$891.8 billion in February 2013, according to data from the Investment Funds Institute of Canada. ETF assets rose to C$81.4 billion over the same period, figures from the Canadian ETF Association show.
Clients are getting more comfortable holding stocks as memories of the 2008 financial crisis fade, said Andrew Munro, an investment adviser at RBC Wealth Management in Toronto. Some are looking to take advantage of the lowest margin borrowing rates he can remember in his 14-year career.
“It’s becoming a more viable option for people to borrow on margin versus getting a loan or line of credit attached to their house,” Munro said. “It’s just the start. As long as the markets don’t collapse we’ll see this grow over the next few years.”
Margin rates go down the more an investor borrows. Clients borrowing as much as C$500,000 can get the prime rate -- 2.85 percent -- and can negotiate lending rates less than prime if they go above that, Munro said.
Rising financial assets are the flip side of Canada’s debt binge. While the ratio of household debt to disposable income rose to a record 163.3 percent in the fourth quarter, Canadians’ financial assets are also rising. Household net worth increased to C$233,000 per person at the end of 2014, up 7.5 percent from the year before, data from Statistics Canada show.
Against that backdrop, the ratio of financial assets to non-financial assets has climbed and averaged 121 percent last year, the highest since 2007. That ratio reached a record 153 percent in 2000 during the technology boom.
The borrowing, whether for mortgages or investing, has been fueled by interest rates near the lowest on record. The Bank of Canada unexpectedly cut interest rates 25 basis points in January to 0.75 percent to counter plunging oil prices which have stunted economic growth.
So far, the strategy of borrowing to invest in stocks has been working. The Standard & Poor’s/TSX Composite Index, Canada’s benchmark gauge, has posted a return of 23 percent including dividends in the two years through March 27. In the same period, the S&P 500 has had a total return of 37 percent.
The tactic can also be risky.
Barry Schwartz, chief investment officer at Baskin Wealth Management, said while he’s had clients interested in the idea, he’s warned against levering up to invest in the stock market.
“The time to have done that was six years ago, not today,” said Schwartz, whose firm manages about C$800 million. “Some people get stars in their eyes and think past performance will continue. I can see the appeal, of course, as the cost of borrowing is so low.”
Colpitts, who paid C$475,000 for his house in 2008, said he uses the strategy safely. “If I do go into margin, I expect my dividends to pay off that margin within a year or two,” he said. “So I think it’s a safe thing to do.”
Elevator mechanic Matthew Little, 29, said he’s concentrating on paying down the mortgage on his house in Pickering, Ontario.
“If I do come into money, I’m dropping money into my house rather than my mutual fund,” Little said. “I find it more stable. Everybody is just snatching up whatever the bank is going to give them, in terms of taking on too much debt.”
For Colpitts, the strategy is ultimately about taking advantage of the current market to improve his position as a long-term investor.
“I’m not trying to time the market,” he said. “Yes, there will be ups and downs, but long-term it is beneficial.”