Using a line of credit for long-term investing

Question

I have recently opened an unsecured line of credit for $20k at 1%. I have a savings account at the same institution making 1.5% - both compounded daily and paid monthly.

I've read a few questions on here relating to paying off debt with itself, and the Canadian personal loans page, but I still feel like I may be misunderstanding something. I've even created a graph outlining a theoretical situation, which may explain my question better:

• The blue line is $20k in savings making 1.5% per month
• The green line is if I borrow the $20k at 1% and put it in the same savings account making 1.5%
• The red line is the amount owed on the LOC

Each month, the 1.5% is added to both green/blue lines, then 1% of the amount owed (minimum payment) is taken from the green line. The lowest minimum payment for my account is $16.67, which is accounted for in this graph.

This is just blue-sky thinking, and I am not accounting for cases where interest rates change, and that the bank would be totally fine with such a long-term loan.

With this setup, would it be a Good Idea™ to exhaust the entire LOC and move it into an account making just slightly more than the minimum payment? Or is my math or understanding of how this works all hopelessly wrong?

Answer 1

Sure, you'd make an $8.33 during that first month with little extra risk. Sounds like free money, right? (Assuming no hidden fees in the fine print.) I don't know that the extra money is worth the time you will spend monitoring the account, especially after inflation claims its share of your pie.

If you're going to use leverage to invest, you should probably pick an investment that will return at a much higher rate. If you can get an unsecured line of credit at 1%, there aren't a lot of downsides. Hopefully interest rates don't rise high enough to eat your earnings, but if they do, you can always liquidate your investments and pay the remainder of the loan.