Tag Archives: loans

Can I Use My TFSA as Collateral for a Quick Loan?

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Sometimes life happens and a person needs a few thousand dollars in a hurry. They may even have that same few thousand saved up in a Tax Free Savings Account but it’s locked up in a GIC that can’t be cashed until it reaches maturity. The question then is: Can I use my TFSA as collateral for a quick loan?

You Can Not Use RRSP Assets as Collateral for a Loan

If you run into financial problems, your bank cannot seize your RRSP assets, at least until you try to withdraw them, to reclaim what you owe them on a loan. Consequently, no legitimate lender will let you use the value of the assets in your RRSP as collateral for a loan.

What Is Collateral?

(This is not a legal definition just an approximate explanation. If you need more details, please talk to a financial expert or lawyer.)

Collateral is something of value that the bank can claim if you default on your loan by not paying it back. For example, if you have a brand new car which is fully paid off, a bank might allow you to list the car as collateral for a small short-term loan. If you don’t pay the loan back in full with the agreed interest by the payable date, the bank can then take your car, sell it, keep the amount needed to redeem the loan and to recover the costs of forcing them to seize your car, etc, then give you the balance of the value.

Banks prefer cash and investment assets as collateral as they are much easier for them to process than physical goods like cars.

You Can Use the Assets in Your TFSA as Collateral for a Loan

Unlike RRSPs, the assets in your TFSA can be pledged as collateral against a loan.

It’s important to remember, though, that the bank does not *have* to allow you to use your TFSA as collateral. It’s up to them. There is no rule that says they must lend you money.

What Type of TFSA Assets Might Be Acceptable As Collateral?

If your TFSA is invested in cash, the bank would probably suggest you just withdraw the cash and use it instead of getting a loan. In most cases, that would be the sensible solution.

If your TFSA is invested in bonds or GICs, the bank would probably allow you to pledge part of the value of those assets as collateral against a loan. They would likely need proof of the terms, principal and interest rates for the assets. You are most likely to be able to get a loan from the same financial institution that holds your TFSA as it would be easiest for them to keep an eye on their collateral and get access to it if you don’t repay your loan.

If your TFSA is invested in individual stocks, mutual funds or ETFs, it gets trickier. The bank would have to decide how risky it thinks those investments are. For example, in mid-November 2008 TD bank shares were worth about $48 each. By mid-December they were down to about $34 each. The institution making the loan knows these types of market drops can occur anytime without warning. Depending on how risky they rate your investments they may or may not accept them as collateral and they are very unlikely to loan you even 90% of the current value of them.

Borrowing Against Your TFSA to Invest in a Non-Registered Account

In his book, How TFSAs Can Make You Rich, Gordon Pape explains that you might be able to use your TFSA as collateral to borrow money which you could then use to invest in a non-registered account.

He also says “you can deduct interest on a loan against a TFSA if the money is used to invest in a non-registered portfolio, say Gena Katz of Ernst & Young Canada and Jamie Golombek of CIBC Private Wealth Management.”

Mr. Pape also points out that many people who borrowed to invest suffered only increased losses, not gains, caused by the crash of 2008-2009. Leverage can increase earnings but it can also cause devastating losses.

For most people and in most situations, I would not recommend borrowing to invest. (Not that you should ever make any investment decision based on my website. Talk to a financial professional for financial advice, not an engineer/tech writer! I’m only trying to share what I’ve learned not tell you what to do.)

In case you don’t already know, you can not deduct interest for a loan used to invest in your TFSA.

Have I Used my TFSA as Collateral?

So far I’ve never needed a short-term loan. I’m hoping I’ll never need to personally test this information.

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Have you ever used your TFSA as loan collateral? Was it to get out of a pinch or to leverage your portfolio? Please share your experiences with a comment.

Why Do We Think We Can Own More Stuff than Our Parents?

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When I sorted out today’s mail, I found a flyer for what looked like living room furniture. It looked pretty and comfortable with thick padded cushions. It was pricey: a club chair for $699, a loveseat for $1499. A closer glance surprised me: it was furniture for outdoors, not indoors. And it made me think back to the stuff my parents could afford to own.

Flashback to the Past

When I was growing up we also liked to eat picnics and bbq’d meals outdoors. We sat at a triangular-ish redwood stained cedar picnic table. My Dad had made it himself. It was more comfortable than our friends’ tables because the benches were detached and you could move them in or out. No one had to sit where the table struts were either. Luxury!
We also had an assortment of aluminum deck chairs that you could fold up. They had nylon webbing to form the seat and back. Things fell easily through the gaps in the webbing and it could stick on humid days. Not great, but we still used them.

For lounging, we had cotton canvas recliners. They also had an aluminum frame and the canvas was attached with little ties along the sides. They, too, could be folded and put away or put into the station wagon to go to the beach or a party.

I doubt that if you added up the cost of all of this outdoor “furniture” you would have paid $699 even allowing for all the inflation during the interim.

What I remember most about those times spent outdoors was the fun: playing lawn darts and badminton; chasing fireflies; playing hide–n–go-seek in the dark with flashlights; eating slightly singed smoky marshmallows; laughing till our faces hurt.

But of course that was then, this is now!
I can hear what someone must be thinking (or else none of this furniture would be selling.) Someone must be thinking: But now things are different. We can afford/want/need nicer things. That old stuff was ugly, uncomfortable and tacky.

The trick is: can we afford it?

My parents were both professionals. Their combined income was quite reasonable. They weren’t as well to do as the doctors and lawyers but we were comfortable. Now, in retirement, they are mildly affluent. They certainly were not blue collar or working class or just getting by or whatever label you use to describe the majority of the work force.

I keep reading snippets in the news that tell me that, adjusted for inflation, average families are now earning less than they were ten years ago.

So why do some people who are earning less think they can afford more than their parents?

That’s not even including all of the disposable technology costs that burden this newer generation. My parents’ generation didn’t have monthly cell phone bills, internet bills, or the costs to upgrade cell phones, computers, laptops, tablets, and gaming consoles every 3-5 years.

So if the pundits are correct, and the average income is down and the average costs (for new technology) are up, where is the money supposed to come from to pay for all this luxury outdoor furniture?

I wish I could say it’s all being sold to the doctors, lawyers and CEOs. But I have a bad feeling there are a lot of teachers, mechanics, shift workers, retail support workers and other “real” people who are trying to afford this stuff.

I hope against hope that the word “credit” is not crossing any of their minds and that the phrase “saving for the future” is. I don’t think I’d want to be facing retirement on an average CPP and OAS pension and nothing else. Not even for the most comfortable backyard bbq furniture in the world. Especially since it’s not the furniture I remember from our gatherings, it’s the people and what we did.

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Do you think we’re being offered too many ways to spend our money on things that won’t last and that we don’t really need to enjoy life? Or do you think we can have it all, maybe by just skipping our lattes on Tuesdays? Please share your views with a comment.