The Strategy for Canadian Real Estate Investors

Real estate is a financing business that happens to involve buildings. Whoever controls the capital controls the terms, and investors feel the cost of borrowed permission more acutely than almost anyone. That is why this application comes up so often.

Speed is the advantage, not rate

The advantage here is rarely the interest rate. A policy loan may cost more or less than a mortgage depending on the year and the lender. The advantage is that the capital is available without an application, which changes what you can credibly offer.

An investor who can close quickly, or who can waive a financing condition because the down payment is already accessible, is a different buyer from one whose offer depends on an approval arriving in time. In a competitive market that difference is often worth more than a fraction of a percent on the rate.

Where it commonly applies

Assembling a down payment without liquidating other holdings at an inconvenient moment. Funding renovations between purchase and refinancing, when conventional lenders are least willing to help. Carrying a property through a vacancy without distress. Covering closing costs, land transfer tax and legal fees that mortgage financing does not reach.

Some investors also use the policy as the place where refinancing proceeds rest between deals, rather than leaving capital idle in an account earning little while waiting for the next opportunity.

It is a complement, not a replacement

This must be said clearly, because it is frequently blurred. A policy does not replace a mortgage. Mortgage financing exists at a scale and a rate that no policy can match for the purchase of a property, and it remains the right instrument for that job. The policy addresses the parts around the mortgage — the deposit, the renovation, the gap, the carry — where conventional financing is slow, expensive or simply unavailable.

Any presentation that positions the policy as a substitute for a mortgage is misleading, and the book says so.

The tax questions are not optional

Where borrowed money is used to earn income from a business or property, interest may be deductible under paragraph 20(1)(c) of the Income Tax Act — but deductibility depends on the use of the funds, the tracing of that use, and the documentation supporting it. The reasoning in Ludco and the cases that follow it turns on facts, not on intentions.

Separately, a policy loan is a disposition under section 148, and proceeds exceeding the adjusted cost basis are taxable. These two rules interact, and the interaction is exactly the sort of thing that is cheap to plan and expensive to fix. Speak to your accountant before you borrow.

Where it does not fit

It does not fit an investor who needs capital now, because the early years build slowly. It does not fit a strategy whose returns depend on continuous maximum leverage, because a policy drained to its limit is a policy at risk of lapsing. And it does not fit anyone who intends to treat the loan as though repayment were optional, because unpaid interest compounds against the contract quietly and patiently.