Cash-on-Cash Return When the Down Payment Comes From a Policy Loan: Why Some Percentages Look Enormous, and How to Measure Them Honestly

Two investors buy the same rental property on the same day, at the same price, with the same mortgage. One pays the down payment from cash. The other borrows it against a participating life insurance policy.

A year later, the first reports a cash-on-cash return of about 6%. The second reports several hundred percent, or simply "infinite", because the cash put into the deal was close to zero.

Same building. Same tenants. Same rent. Same mortgage. How can one return be a hundred times the other?

Why does this matter? Because a percentage that looks extraordinary changes behaviour. An investor who believes a policy loan multiplies returns will borrow more, buy faster and carry less of a cushion. Real estate rewards patience and punishes thin margins. A vacancy, a repair, a mortgage renewal at a higher rate: each of these is manageable for an investor who measured the deal honestly, and dangerous for one who measured it with a denominator close to zero.

This page explains what cash-on-cash return measures, why a borrowed down payment can make it look enormous, and four honest ways to measure a rental deal when the down payment comes from a policy loan. It also sets out what the policy route genuinely offers an investor, because it does offer something. It is just not a higher return.

Here is the deal, measured both ways.

What is cash-on-cash return, and what does it leave out?

Cash-on-cash return is the year's pre-tax cash flow from a property, after all financing payments, divided by the cash you put into the deal. It is a useful measure of how hard your own cash is working. It leaves out principal repayment, appreciation, tax and risk, and it becomes meaningless when the cash put in approaches zero.

The measure is popular because it is simple. Take the rent, subtract the operating costs and every financing payment, and you have the year's cash flow. Divide by the cash you invested, usually the down payment and closing costs, and you have the return on that cash.

It answers one question well: if I had put this cash somewhere else, how does the cash this property throws off compare? It answers several questions badly, or not at all:

• Principal repayment. Part of every mortgage payment reduces the debt. That builds equity, but cash-on-cash ignores it.
• Appreciation. A rise or fall in the property's value does not appear.
• Tax. The measure is before tax.
• Risk. Two deals with the same cash-on-cash return can carry very different risks.
• The source of the cash. If the "cash" was itself borrowed, the measure no longer measures what it claims to.

That last point is the one this page is about.

What does the deal look like with a cash down payment?

In this page's hypothetical example, a $480,000 duplex bought with a $96,000 cash down payment and a $384,000 mortgage produces about $5,600 of pre-tax cash flow in its first year. That is a cash-on-cash return of about 5.8%.

Every figure is an assumption for illustration, not a quote or forecast.

The first year:

A modest, positive return on a fairly priced property. Many experienced landlords would recognize those proportions.

What happens to the same deal when the down payment is a policy loan?

The property earns exactly the same, but the household now pays interest on the $96,000 it borrowed from the insurer. At an assumed 6.5% policy loan rate, that interest is $6,240 a year, and the deal's cash flow after all financing costs falls to about $640 below zero.

Now suppose the investor borrows the $96,000 against the cash value of a participating policy built over several years, at an assumed 6.5% loan rate.

Here is where the enormous percentage comes from. If the policy loan interest is left out, because it is "paid to your own system" or simply left unpaid, the deal still shows $5,600 of cash flow. Divide that by a cash investment close to zero, and the result is several hundred percent, or infinite.

Both halves of that calculation are wrong for the same reason. The interest is a real cost, paid to the insurer, whether it is paid each month or added to the loan. And the cash was not zero. It was paid earlier, as premiums, and it now sits in the policy as the collateral for the loan.

Why does dividing by a small number mislead?

Because a percentage is only as meaningful as its denominator. When the cash you count as invested shrinks towards zero, any positive cash flow produces a percentage that grows without limit. The deal has not become better; the measure has stopped working.

Picture the same $5,600 of cash flow divided by smaller and smaller amounts.

Nothing about the building changed from row to row. Only the denominator did. The tenants, the rent and the mortgage are identical in every row. A measure that can be pushed anywhere by choosing what to count as "your cash" is not telling you about the property any more.

This is why serious investors do not judge a fully financed deal by cash-on-cash return alone. They look at what the deal does to their cash flow after every financing cost, and at what it does to their net worth.

Is a property bought with a policy loan owned free and clear?

The title can be free of a mortgage if the whole price was paid with a policy loan, but the household still owes the insurer the full amount. Its net worth is exactly what it would be with a mortgage of the same size. What changes is who the lender is, what secures the loan, and who sets the repayment schedule.

Some presentations describe a property bought entirely with a policy loan as owned "free and clear", because there is no mortgage registered against it. Legally, that can be accurate about the title. Financially, it is incomplete. A $200,000 property bought with a $200,000 policy loan adds $200,000 of assets and $200,000 of debt to the household's balance sheet, exactly as a $200,000 mortgage would.

The differences are real but different from what the phrase suggests:

• The collateral. The loan is secured by the policy's cash value, not by the property.
• The schedule. A policy loan usually has no fixed repayment schedule. Interest not paid is usually added to the loan.
• The rate. The insurer sets the loan rate under the contract, and it can change.
• The consequence of not repaying. A mortgage lender can enforce against the property. With a policy loan, an unpaid balance that grows past the cash value can end the policy, and whatever is owing at death comes off the death benefit.

A property with no mortgage but a policy loan behind it is not debt-free. It is financed differently.

What are four honest ways to measure the deal?

Measure cash flow after every financing cost, the property's total return, the household's net worth compared with paying cash, and the deal's resilience to a bad year. Together, they tell you what one cash-on-cash percentage cannot.

1. Cash flow after every financing cost. Include the mortgage and the policy loan interest, whether or not the interest is paid each month. In the example: about $5,600 with a cash down payment, about $640 below zero with a policy loan down payment.

2. The property's total return. Add principal repaid on the mortgage and an assumed appreciation to the cash flow. With the example's mortgage, principal repaid in year one is about $7,977. At an assumed 2% appreciation, the value rises by $9,600.

The property's total return is the same either way. The policy loan route is lower by exactly the loan interest.

3. The household's net worth, compared with paying cash. Suppose the household has $96,000 on deposit and a policy with enough cash value to lend $96,000. Paying cash empties the deposit. Borrowing keeps the deposit, which earns, say, 3%, or $2,880 a year, while the loan costs $6,240. On these assumptions, the household that borrows ends the year about $3,360 behind the one that pays cash, before tax. That is the same lesson set out on earn 8%, pay 13%: on rates alone, borrowing at a higher rate than your money earns costs you the difference.

4. Resilience to a bad year. Ask what happens if a unit is vacant for three months, a roof needs replacing, or the mortgage renews at a higher rate. With $5,600 of positive cash flow, the cash-funded owner has a cushion. With negative cash flow, the policy-funded owner is already drawing on other money every month, before anything goes wrong. On the other hand, the policy-funded owner still has the $96,000 deposit available for exactly those surprises. Which position is stronger depends on whether that reserve is truly kept for them.

Then what does the policy loan route genuinely offer an investor?

A reserve and control. An investor who borrows the down payment from a policy, instead of draining savings, keeps cash on hand for vacancies and repairs, sets the repayment schedule, needs no credit application for that loan, and keeps the policy's coverage and guarantees in force. Those are real advantages. A higher return is not one of them.

Here is the honest list.

Interest deductibility deserves a precise sentence. Under subparagraph 20(1)(c)(i) of the Income Tax Act, interest on borrowed money used to earn income from a business or property can be deductible, and subsection 20(2.1) adds that interest on a policy loan counts only to the extent the insurer verifies it in the prescribed form. How that works for a rental is set out on interest on a policy loan used for a rental.

And mortgage lenders have their own rules. Some limit where a down payment can come from, and a policy loan is a debt you must declare when you apply. Ask the lender before you commit.

How should you decide, step by step?

Underwrite the property on its own merits first. Then compare paying cash with borrowing the down payment, with the loan interest counted. Check the lender's rules. Decide based on cash flow, net worth and resilience, not on a single percentage.

1. Run the deal as if paid in cash. If it does not work with a cash down payment, a policy loan will not rescue it.
2. Add the policy loan interest at the insurer's current rate, and at a higher one.
3. Compute the four measures above: cash flow after all financing, total return, net worth versus paying cash, and the bad-year test.
4. Ask the mortgage lender whether it accepts a down payment borrowed against a policy, and declare the loan.
5. Ask the insurer for the loan rate, how it is set, and the interest verification form for tax.
6. Write the repayment plan for the policy loan, from rent, refinancing or sale, with a date.
7. Keep the reserve as a reserve. The savings you did not spend are the reason to borrow. Do not spend them on the next deal.

How investors use a policy loan for the next down payment, and how to repay it from rent, is set out on a policy loan for the next down payment.

How does a policy loan down payment compare with a home equity line of credit?

Both are borrowed money, so both add interest to the deal and both lower the cash flow by about the same amount at the same rate. They differ in what secures the loan, who sets the rate and terms, how much can be borrowed, and what is put at risk if the deal goes wrong.

Many investors who do not use a policy fund their down payments with a home equity line of credit on their own home. Set side by side with a policy loan, the arithmetic is almost identical: at the same 6.5% rate, $96,000 borrowed costs $6,240 a year in interest either way, and the deal's cash flow falls to the same figure below zero.

What differs is everything around the rate.

The limit on a line of credit comes from OSFI's guidance for federally regulated lenders: a maximum loan-to-value ratio of 65% for the revolving portion of a home equity line of credit is described as foundational, and lending above that should be amortizing. That limit matters to an investor who plans to fund several down payments from one home.

So the choice between the two is not about which is cheaper. It is about which asset the investor would rather pledge, who should control the terms, and what the family can least afford to lose. Some investors use both, at different times, for different properties.

Who should help you?

A licensed insurance professional with years of hands-on experience with policy loans used for real estate, an accountant who works with landlords and understands interest deductibility on policy loans, and a mortgage professional who knows each lender's rules on down payment sources.

The product without the understanding is just an insurance policy. The understanding without experience is just theory. An investor's team should be able to run the same deal three ways and tell you plainly which one leaves you stronger. In Quebec, the insurance professional is a Financial Security Advisor (conseiller en sécurité financière); in other provinces, a licensed life insurance agent.

I should be plain about my own position: I am paid by insurer commissions when a policy is bought. That is a conflict of interest, and it is one reason this page shows where the policy loan route lowers the return.

How should you read the figures on this page?

Every amount, rate and value is a hypothetical assumption: a $480,000 duplex, a $96,000 down payment, a $384,000 mortgage at 5% over 25 years, rent of $3,600 and costs of $900 a month, a 6.5% policy loan rate, 2% appreciation and 3% on cash kept on deposit. None is a quote or forecast. The tax rules are those of the Income Tax Act as consolidated to 30 September 2026.

Results are before tax. The mortgage payment uses semi-annual compounding, the convention for fixed-rate mortgages in Canada. Dividends on participating policies are not guaranteed and are declared each year by the insurer's board. Policy loans carry interest at the insurer's rate and are a disposition for tax purposes. Amounts are in Canadian dollars.

What this page will not tell you

This page shows how to measure a rental deal funded with a policy loan. It does not tell you whether to buy a property, what any property will earn, what any lender will accept, or what any insurer will charge. Those answers depend on the property, the market, your income, your policy and your tax position, and they come from your insurance professional, your accountant and your mortgage professional. What it can give you is a habit: whenever a return is quoted, ask what the denominator is, whether every financing cost is in the numerator, and whether the figure would still look good if the cash flow fell for a year. Those three questions protect an investor far better than any single percentage. Ask the people who advise you to run the same property three ways, with a cash down payment, a line of credit and a policy loan, and to show you the cash flow, the net worth and the bad-year test for each. If one of them can only show you one way, ask why.

Who this does not suit

Funding a down payment with a policy loan does not suit an investor whose deal only works on a borrowed denominator, who has no reserve beyond the policy, whose income cannot carry negative cash flow, or who has no plan to repay the loan. For that investor, a smaller property, a larger cash down payment or a longer wait is usually the better choice.

It can suit an investor with a property that stands on its own numbers, steady income, a policy with ample cash value, and a clear repayment plan, who values keeping savings on hand and controlling the schedule. For that investor, the policy loan is a financing choice made with open eyes.

A good deal does not need an enormous percentage to look good. It needs honest numbers that still work in a bad year.