Should You Borrow to Invest? Leverage, Risks and Returns

There are several ways to borrow money to invest. Each option has different costs, tax consequences and risks, so it’s important to understand how they work before using leverage to grow a portfolio.

Opening a margin account

One straightforward method is a margin account at a brokerage. With margin, the broker lends a percentage of the value of the securities held in the account. The amount you can borrow is governed by maintenance requirements, which act as collateral thresholds. These requirements commonly range from about 30% to 100% of a security’s market value. For example, some large, established blue‑chip stocks may carry a 30% margin requirement, meaning you could borrow up to $70 for every $100 of eligible holdings.

Margin interest rates vary by broker but often fall in the mid‑single to low‑double digits. In many Canadian cases, margin rates are in the neighborhood of 7% to 10%, though they can differ depending on the lender and the borrower’s relationship. Interest on margin loans is generally tax‑deductible only when the borrowed funds are actually used to earn investment income. If securities decline in price, the brokerage can issue a margin call requiring you to add funds or sell holdings to lower your loan balance.

Investment loans and RRSP financing

Another borrowing option is a dedicated investment loan that requires monthly principal and interest payments. Loans arranged specifically to fund Registered Retirement Savings Plan (RRSP) contributions—often marketed as RRSP loans—can come at competitive rates, sometimes as low as prime in certain promotions. Non‑registered investment loans are typically priced at prime plus a margin.

Interest on borrowing can be tax‑deductible in Canada, but the rules depend on how the borrowed money is used. Generally, interest is deductible only when the loan funds are used to earn taxable investment income. Interest on money borrowed to invest inside tax‑sheltered accounts such as an RRSP or a Tax‑Free Savings Account (TFSA) is not tax‑deductible, because investment returns inside those accounts are not taxed. Conversely, interest paid to earn taxable investment income outside registered accounts can often be deducted.

Using a mortgage or line of credit to invest

Home equity lines of credit (HELOCs), second mortgages or other loans secured by real estate can also be used for investment. The tax treatment of the interest hinges on the use of the proceeds: if borrowed funds are used to acquire an income‑producing asset—such as a rental property, or investments that generate taxable income—the interest may be deductible. By contrast, borrowing against real estate for personal expenses does not make that interest deductible simply because the loan is secured by property.

For example, money borrowed against a primary residence could be deductible if those funds are applied to buy, renovate or otherwise improve a rental property that generates rental income. The key factor for deductibility is the purpose for which the funds are used, not the asset used as collateral.

Is borrowing to invest worth it?

Borrowing to invest amplifies both potential gains and potential losses. Leveraging can boost returns when investments perform well, but it magnifies downside when markets fall. Historical averages provide a context for the trade‑off: over long periods, Canadian prime lending rates have averaged in the mid‑single digits, and broad stock market returns have historically exceeded those rates, but past performance is not a guarantee of future results. For example, long‑term averages through the end of 2022 show Canadian prime rates roughly around 7% historically, while major equity indexes delivered higher average returns over multi‑decade spans.

Does it make sense to borrow to invest? It depends

Whether leveraging makes sense depends on the asset mix, fees, taxes and investor behaviour. Many investors do not hold 100% equities; adding bonds and other fixed‑income assets typically lowers expected returns but also reduces volatility. Investment management fees, transaction costs and poor timing—such as buying high and selling low—erode returns and can negate the benefit of borrowing.

Real estate behaves differently than publicly traded securities and can be a more natural fit for borrowing. The return on real estate depends on both price appreciation and net rental income. Rental markets and local economics vary, so returns are less uniform and less easy to compare to stocks. Real estate is generally less liquid and less volatile than equities, which can make it easier for leveraged owners to avoid panic selling during downturns. Additionally, rental income tends to rise with inflation over time, helping to service debt, though local rent‑to‑value ratios are critical to the overall economics. Low rents relative to high purchase prices should be treated cautiously.

It’s a skill—and a judgement call