This calculator is designed to be able to calculate the net benefit (or loss) over a range of returns from borrowing to invest using Interest-only or term loans. You have two ways in which you can use this calculator, the first is a stand-alone option or second you can choose your client from your database and have it loaded into the calculator. Once your client is selected, go to the Navigation panel, to the drop-down Calculators menu and select “Leverage Calculator”. Under “Load Client”, click drop-down menu and choose your client.
Under the province, this will auto-populate if you have chosen a client from your database if not you will need to choose the correct province.
Enter the marginal tax rate you wish to use, again the auto-populated clients will automatically have their marginal tax rate transferred from your database into the tax box, however you should review this and you can change this if you wish.
Under the “Loan Details” section, you will see two radio buttons that allow you to enter either the amount of the loan or the annual payment for the loan. Once you enter the Loan amount and other pertinent loan data, the annual payment will be calculated. Enter the amount of the loan you wish to illustrate in the Loan Amount data box. Enter the interest rate for the loan and the number of years for the loan period.
You have two choices under “Loan Type”:
- “Interest only Loans” are loans that require the borrower to pay only interest on the loan during the loan period. Since the principal is not repaid until the loan is paid out, the loan balance remains the same throughout the leverage.
If “Interest-only” leverage is chosen, this strategy shows most clearly the effects of the leverage – it magnifies gains and losses and allows borrower to have the most control over their cashflow.
- “Term Loans” are a repayment of both the loan and the interest in a blended payment. At the end of the term, the investment loan is completely paid off. Because each loan payment covers the interest expense and some repayment of the principal borrowed, the Annual Loan Payment is higher than the annual payment for an interest only loan.
Under the “Before-Tax Return” section, there are three consistent rates of return that are calculated:
- No growth on the investment
- The break-even point
- An editable box for the rate of return you wish to use for the illustration. (This is the rate that will be used on the client Leverage report.)
You may add additional rates of return for illustration by clicking the “Add” button and an editable box will appear.
Breakdown of Investment
This is the section where the advisor chooses the breakdown of the investment. You access this by clicking on the “+” sign beside Breakdown of Investment and an editable box will drop down.
There are four investment income categories - interest, dividend, taxable capital gain and deferred capital gain. Each type of income will be taxed according to the appropriate taxation for that category. An assumption in the results table is that the results are shown year by year, as if the leverage investment was cashed in during that year of the loan.
The program also shows the net before-tax balance after paying off the loan. The net before-tax balance is the investment income that remains after cashing in enough funds to repay the loan completely.
Interest income is fully taxed at the marginal tax rate. 100% of loan interest in taxable.
Dividends are taxed using the Enhanced Dividend Tax Credit. This requires the advisor to put in the correct combined federal and provincial tax rate for their province or territory. The tax rate information is placed in the editable box under the “Credit” heading. The updated annual enhanced dividend rates are listed in a separate table.
Taxable Capital Gain
Capital gains income is taxed on 50% of the gain at the marginal tax rate.
Deferred Capital Gain
With deferred Capital Gain, when the amount to pay off the loan principal is withdrawn, more than the loan amount must be redeemed. The loan is paid off in after-tax dollars. The amount withdrawn will be the loan amount, plus additional shares to pay the tax bill on the capital gains, triggered from the redeemed shares.
The first box shows the Net Before-Tax values after 10 years.
- Column 1 if the % of return from the three consistent returns.
- Column 2 shows the dollar value with no leverage.
- Column 3 shows the value of the leverage.
- Column 4 shows the $ increase (decrease) between no leverage and leverage
- Column 5 shows the % increase (decrease) between no leverage and leverage.
The second box shows the net after-tax results of the rate of return you have chosen for the report, on a year by year basis. Analysis results for the projected returns are summarized on the Summary Report or Detailed Reports.
You’ll notice there is a check box immediately below the Breakdown of Investment Box. Checking this off will give you access to the Reliability Calculator. This is a new calculator that shows the likelihood of achieving various returns based on the length of time an investment is held. This calculator also pulls data from the client’s model portfolio, to indicate the likelihood of achieving the return over a period of time.
There are 4 reports available for this calculator the “Summary Report” and the “Summary Report with Signatures” shows the net before-tax rates of return over a 10-year period. The “Detailed Schedule” is the report for the rate of return you have chosen as your expected rate of return. And lastly, the “Uncertainty on Leverage Loan” report summarizes your assumptions and charts the likelihood of achieving returns in a table comparing ROR/ Time horizon. There is also a year-by-year chart showing the likelihood for the number of years held of achieving the returns you have entered.