According to Jason Pereira, partner and senior planning consultant at Ontario-based planning practice Woodgate Financial, the update doesn’t amount to much of anything.
“Basically, it effectively prevents people from borrowing more than two thirds of the equity value of their home, and we’re already pretty close to that,” Pereira told Wealth Professional.
Pereira estimates that inappropriate use of leverage has consistently been among the top three complaints made to any investment regulator in Canada. That stems from the fact that advisors have traditionally been massively incentivized to convince clients to take on debt in order to juice up their investments, which increases the amount of compensation the advisor could potentially get from trailing commissions or asset-based fees.
“With the use of HELOCs, it’s possible to get several hundreds of thousands of dollars invested right away,” he says. “This was abused to high heaven for years and years.”
While there have been crackdowns on the practice, and compliance and regulations have improved over time, Pereira says investors still get trapped into leveraged investment schemes by a minority of nefarious advisors. At his own practice, clients are educated on the use of leverage to invest (“we want them to understand it’s an amplifier of both returns and risk”), and very few clients ever go for the option.
