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Term (Amortizing) Investment Loan

Section titled “Term (Amortizing) Investment Loan”

Objective — invest a lump sum borrowed at t=0 and repay the loan on a fixed amortization schedule, so the debt reaches zero by the end of the term.

Risk level — 2 — Moderate risk. Risk justification — net market exposure increases, so level 2 at minimum; the amortizing balance means the exposure declines over the term, which makes it the lower-risk sibling of interest-only-investment-loan rather than a different tier. Benefit justification — unverified — needs Talbot. Jurisdiction — Canada. U.S. designed, not implemented.

Prerequisites

Section titled “Prerequisites”
  • Capacity to service principal and interest from income — a materially higher cash-flow requirement than interest-only.
  • A non-registered account (account_type="taxable"; other types raise NotImplementedError by design).
  • The same suitability prerequisites as any leveraged strategy.

Mechanism

Section titled “Mechanism”

A single loan drawn at t=0 and invested, repaid by level payments split between interest and principal. Each year’s interest portion falls and the principal reduction rises, so the outstanding balance — and the leverage — declines. The engine tracks loan balance, interest part, loan reduction and after-tax cash flow per year, and solves for the break-even return (TermBetterThanReturn).

Benefits

Section titled “Benefits”
  • Leverage that ends. The debt retires on a known date without requiring a sale.
  • Declining balance means declining exposure over the term.
  • Payment discipline is structural, not behavioural.

Risks

Section titled “Risks”
  • The highest ongoing cash-flow demand of the loan strategies: a decline in income hits harder here.
  • Less capital compounds over the period than in interest-only, because payments divert cash to principal.
  • The deductible interest — and therefore the tax benefit — shrinks every year.
  • Same rate, deductibility and behavioural risks as interest-only-investment-loan.

Failure modes

Section titled “Failure modes”
  • Choosing a term that outruns the borrower’s income stability.
  • Funding payments by selling the leveraged assets — which defeats the strategy and crystallizes tax.
  • Treating the amortization as a substitute for suitability. It reduces exposure over time; it does not make the first years safe.

Costs

Section titled “Costs”

Interest plus principal over the term; setup costs; tax at exit.

Tax considerations

Section titled “Tax considerations”

Interest deductible under ITA §20(1)(c); the deduction declines with the balance. Quebec’s limited deductibility applies as in interest-only.

Who it may suit

Section titled “Who it may suit”

An investor who wants leverage with a defined end date and has the cash flow to amortize it — the more conservative choice where both are viable.

Who should avoid it

Section titled “Who should avoid it”

Most people, per Rule 1. Specifically: anyone whose cash flow only supports interest, who is better served by evaluating interest-only-investment-loan honestly than by taking a term loan they cannot amortize.

Implementation outline

Section titled “Implementation outline”
  1. Suitability first, as for any level 2 strategy.
  2. Model both term and interest-only across a range of returns including negative ones.
  3. Choose a term the borrower can service through an income interruption.
  4. Non-registered account, segregated tracing.

Evidence status

Section titled “Evidence status”

implemented-and-verified — sd-math/strategies/term_loan.py, a verbatim port of CalcTermLevAnalysis, covered by the same four-layer M5 audit: golden fixtures against LevPro’s PDFs (±$2), first-principles tests to the cent, VB6 line-for-line cross-check, and an independent algebraic re-derivation.

One documented deviation, carried openly: MAX_DIFF is relaxed to 1.0 because the VB6 application used a rounded loan payment (e.g. 5850) where PMT computes 5849.95; the original 0.005 tolerance would reject valid fixture inputs.

Counterarguments

Section titled “Counterarguments”
  • Same FAIR Canada evidence as interest-only-investment-loan. Amortization narrows the exposure window; it does not answer the objection that leverage was recommended to unsuitable investors.

Variants

Section titled “Variants”

Implemented: monthly, historical, and historical-monthly variants (term_loan_monthly, term_loan_historical, term_loan_historical_monthly).

Section titled “Related strategies”

interest-only-investment-loan · interest-only-then-term-loan · conservative-leverage-ratio · better-rates-investment-loan

Sources

Section titled “Sources”
  • ~/projects/monorepo/packages/sd-math/src/sd_math/strategies/term_loan.py — implementation, including the documented MAX_DIFF deviation
  • ~/projects/monorepo/packages/sd-math/docs/accuracy-audit.md · docs/test-report.md — verification evidence
  • Core/_WorkingOn/Research/canada-investment-taxation.md §9 — after-tax framework
  • Core/_WorkingOn/Research/LevPublications/Leverage-Publications-Summaries.md — CIRO suitability guidance

Open questions

Section titled “Open questions”
  • U.S. implementation, gated behind the Canada restart.