Borrowing $25,000 From A Credit Card For Investment Purposes

by Mike Holman

This is a guest post by Rat from Ending The Rat race – a good Canadian blog.  Check out his site and subscribe to the RSS feed.

The Rat is a young investor and entrepreneur hailing from the east coast. After earning a Bachelor of Commerce, he returned home at the age of 21 to work in various capacities, most of which were in the private sector. There, he had the opportunity to accumulate over ten years of business experience in a range of senior management levels, take advantage of real estate opportunities, and invest in equities and other types of investment vehicles. In January 2010, he was able to retire and hence “end the rat race” in his early 30’s.


Taking The Plunge

After researching and reading various articles from some of the prominent personal finance sites in the blogosphere over the span of the past few weeks, I found myself constantly revisiting Four Pillars’ thought provoking “Leveraged Investments” series.

In retrospect, aside from being inspired by Four Pillar’s series, I believe the motivation behind wanting to take the plunge and borrowing funds for investment purposes probably originated from a thread I published back in March, titled, “Borrowing Against Your Home”.

If I had to stress one thing in relation to implementing my leverage plan, is that the strategy I used differs significantly from what many would consider to be the more generally accepted or contemporary way of leveraging funds for investment purposes.

In fact, there were some stipulations that needed to be met in order for me to come to terms with borrowing to invest.

My Requirements & Stipulations

In order for me to get over the mental hurdle of being comfortable with leveraging, a few of my own requirements had to be met.  Here they are:

  • Interest rate on the loan had to be among the best available in the country.
  • Under no uncertain terms did I want to borrow against the equity of my home. To be frank, the prospect of having to pay a mortgage twice frightens the hell out of me.
  • The total amount borrowed had to be an amount that I could easily circumvent and get out of should a cataclysmic event occur in the markets.
  • The potential for high share price appreciation in a relatively short period of time had to be a possibility. The intention of this plan is not one that involves ‘being in it for the long-haul’ as with my regular investments. This plan has an expiry date.

Pertinent Details About My Plan

In terms of discussing some of the more intricate details surrounding the borrowed funds, I have to say, I’m pleased with the terms.  As I alluded to above, my goal was to be able to get the lowest possible rate without having to get a secured loan against the equity of my home.  In reality, I could have borrowed a lot more, but the terms weren’t favorable, at least for my purposes.

For example, with my BMO InvestorLine account, I was approved for a margin account. If I wanted to use the available funds today, I could borrow over $100,000, but the rate for doing so is 3.50%.  This rate did not appeal to me, nor does the prospect of getting a margin call on my account if market conditions deteriorate significantly.

A second source of funds I could have used was from my CIBC personal line of credit. At my current lending rate of prime + 2% (2.25% + 2.0%), which amounts to 4.25%, I wasn’t interested in utilizing any of the available $35,000 for investment purposes.

Despite the fact that the interest on the investment loan is tax deductible come tax season, I just wasn’t interested in securing any assets or diving in with a higher interest rate situation. Besides, many will attest that rates are poised to soon rise, so if I’m borrowing funds that are tied to the prime rate, the interest expenses will also increase.

There just had to be something better…and there was.

The Lowest Rates I Could Find: MBNA

If you haven’t heard of MBNA, it is an affiliate entity of the Bank of America. The institution offers a host of financial products such as credit cards, insurance, and so forth. This is where I borrowed the $25,000.

Over the past week or two, I called MBNA to see if they had any promotional offers on balance transfers for existing customers, and it turned out they did.

They offered me a promotional 0.99% interest rate until January 2011.  I presently own three MBNA cards: the Platinum Plus
(credit limit of $15,000), the Eco-Logique (credit limit of $5,000), and a University Card (credit limit of $5,000). Because they were willing to offer me a total of $25,000 at 0.99% interest, I decided to go with all of the promotional offers for each of the cards.

In fact, after confirming details with a representative over the phone, the interest is actually closer to 1.99% because of the fact that there are some extra fees associated the monthly interest charges.

Regardless, based on the math, my monthly expense for the $25,000 borrowed should amount to about $40-$50 a month. Not bad for being able to get access to $25,000!

In the interest of transparency, one thing to keep in mind is that there is a one-time charge of 1% on balance transfers, so by borrowing  $25,000, I had to pay a one-time fee of about $250.  This is not a recurring expense.

Despite this irritation, I still felt it was worth availing of these funds. What I like about MBNA is that once things are in place, there are no surprises when it comes to the monthly interest I have to pay, as long as I don’t miss a payment along the way.  Unlike my PLC, I won’t have to make large payments that focus on paying down the principal while paying interest; the promotional rate will be in full effect until early 2011.

The Overall Objective

As I mentioned, this plan has an expiry date. The end date will be January 2011, when the promotional rates expire. My hope is that I will have earned sizable capital gains on the investments purchased and get out before the promotional rates on the cards expire and rise dramatically. Sounds risky, right? That’s because it is.

One of the core objectives of this plan was to aim for high share price appreciation in a relatively short period of time; as a result, growth stocks are considered to be of paramount importance with this plan.

The Investments I Purchased

The following is the list of stocks I bought under this plan; I feel many of them offer share price appreciation in the months to come:

1.    New Millennium Capital Corp (NML.T): I bought 4500 shares at $1.13 per share. If you’d like more information about this company, I wrote a guest post for the Intelligent Speculator a while back – feel free to read up.  Total amount of transaction: $5,085.

2.    Labrador Iron Mines (LIM.T): I purchased 800 shares at $6.42 per share. Total cost of transaction: $5,136.

3.    Aurizon Mines (ARZ.T): I bought 1,036 shares at $4.86 per share. Total cost of transaction: $5,005.80.

4.    Goldbrook  Ventures (GBK.T): I purchased 15,000 shares at $0.31 per share. Total cost of transaction: $4,650.

5.    Consolidated Thompson Mines (CLM.T): I bought 240 shares at $9.89 per share. Total cost of transaction: $2,376.

6.    Baffinland Iron Mines (BIM.T): I purchased 3472 shares at $0.72 per share. Total cost of transaction: $2,499.84.

Total amount invested after 1% transfer fees (and leaving a bit of room so the borrowed funds do not exceed the respective card limits): $24,752.64

Ten Month Waiting Period

That about sums up the details of my leverage plan! I’ll know in 10 months or so if the strategy was a success. Who knows, maybe Four Pillars will invite me back for a guest post to report on how things materialized?

At any rate, it’s important for you to know that I am not a professional of any kind. I am also the furthest thing from being a financial advisor, so be sure to do your own diligence before embarking upon a leverage strategy of any kind. The same applies when considering investing in any of the stocks that I have mentioned in this post. A lot of the stocks mentioned are junior mining companies and investing in them certainly brings an element of risk.

Readers, what are your thoughts about this plan or leveraging in general? Have you ever borrowed to invest in any way? If not, is it something that interests you? Regardless, I’d like to know.

Ending The Rat Race would like to thank Four Pillars in allowing for this guest post to become a reality. Many thanks!

[Image Source: http://www.sxc.hu/photo/325650]

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