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Borrowing money today to invest in the future is a strategy many successful investors have used to reach their personal and financial goals — whether it’s buying a house, paying for an education or starting a business.

A less common, but equally forward-looking strategy for some, is borrowing to build an investment portfolio that includes stocks, bonds and investment funds.

Taking on debt to secure investments may seem counterintuitive to some but the potential returns may be lucrative if done strategically, says Tony Maiorino, head of the RBC Wealth Management Services team.

“Borrowing is something people do every day — for a car, a home or a vacation property,” says Maiorino. “The question is, should you borrow to invest money in the markets? The answer to that question is much more complex.”

Borrowing to invest means you can deploy large amounts of capital either all at once or over a period of time. The interest, for those investing in publicly-traded securities, may also be tax deductible. One risk is an investment made from borrowed money may drop in value, which could be less of a concern if it's a long-term move. Additionally, the cost of the loan over time may become higher than the profit made from it.

Maiorino says investors looking to leverage their investment portfolio need to ensure this strategy meets their overall financial goals, and tolerance for risk.

“Done in a diversified and careful way, borrowing to invest can be as valuable as investing in a home over the long term,” he says. "To me, it's about the individual and ensuring the strategy is right thing for them.”

According to a survey conducted by The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management, 53 percent of investors in Canada say growing their wealth is a top investment strategy.

The New wealth rising survey targets high-net-worth individuals (HNWIs), adult children of HNWIs, and high-earning professionals across Canada, the U.S., UK, China, Hong Kong, Singapore and Taiwan. It looks at the shifting landscape of global wealth, where wealth will be, what it will be invested in, how it will be invested and who is investing.

In Canada, 31 percent of younger generations* say they borrow to invest, with 49 percent preferring stocks and 44 percent preferring mutual funds.

Starting early to build wealth

Borrowing to invest can begin even before someone has built up a sizeable investment portfolio, Maiorino says. For instance, an investor in their 20s and 30s might consider borrowing to contribute to a registered retirement savings plan (RRSP) each year. Deductible RRSP contributions can be used to reduce personal income tax.

Investors can then use their tax refund to repay a portion of the loan and then, ideally, work to repay the remainder later in the year, Maiorino says. The process can then be repeated to build wealth.

“If you can afford it, and can make the payments, it's a no-brainer,” says Maiorino, who used this strategy earlier in his career to build up his personal investment portfolio.

“The one thing you can't get back is time,” Maiorino says. “If you start retirement savings at 25, by the time you're 35, you'll have 10 years of investments,” plus any accumulated growth. “That's something a person who starts investing at age 35 is never going to have.”

Borrowing to grow your wealth

Once an investor has a sizeable investment portfolio, they may wish to borrow against it in order to help expand their wealth. Ann Bowman, head of Canadian Private Banking at RBC Wealth Management, says this is an option best-suited to investors comfortable with risk, as well as a conviction they may generate a higher return than the cost of the loan.

“It's for the type of investor with a strong risk appetite and strong experience in the markets,” Bowman says.

Investors who own their own home can also borrow against the asset through a home-equity line of credit. Bowman says it’s a good move for people with a lot of wealth tied up in their home, and who feel they can pay off the loan in a time frame that aligns with their financial plan. A home-equity loan may not be ideal for people with inconsistent income streams, for example.

“You have to do it within your risk appetite and ability to support the debt,” Bowman says.

​An investor may also choose to leverage their portfolio to diversify their assets. For instance, if an executive has a lot of assets tied up in company stock, they may wish to borrow against their portfolio to invest in another asset class. “Many advisors would say it would be a good strategy to diversify away from that,” says Bowman. “We want to understand the client’s wealth-planning objectives.”

Another advantage to borrowing against a portfolio is there’s no formal credit application, as there is with a mortgage for example, and the loan can be provided relatively quickly. The disadvantage is it could be exposed to a margin call, whereby your advisor requests additional funds, if the assets fall below the account’s required minimum value.

Having a potential margin call on an investment account is only something Maiorino recommends for more sophisticated investors with a stomach for volatility. “This type of investor has to understand what they're getting into because it's more complex than a standard demand loan from a bank or a mortgage,” he says.

Developing a long-term investment strategy

Whether borrowing to invest is the right strategy depends on the investor's longer-term objectives, Maiorino says.

For instance, leveraging an investment account might make sense for a Millennial investor saving for retirement decades down the road, or a Baby Boomer setting up an investment account for their child to access when they’re an adult. “You have to have a long-term approach,” Maiorino says.

Investors should also understand how the markets work, including the potential for extreme volatility. Someone who panics when they see the markets drop may not be well-suited to the strategy, Maiorino cautions.

“With your investments, you have the ability to see the value on a minute-by-minute basis,” he says. “That can play with our emotions and can sometimes cause people to make decisions that might not be part of that long-term approach when they borrowed the money to invest.”

Some investors choose the dollar-cost averaging strategy, which involves investing smaller sums over time. "That can sometimes ease the mind of the individual who may be concerned about the value of the investment dropping in the near term," Maiorino says. “Still, if that's a major concern, borrowing to invest may not be right for you.”

According to New wealth rising survey, 46 percent of HNWIs in Canada say global economic uncertainty is one of their top concerns around creating, preserving or managing their wealth. Other factors of concern are an increased cost of living (45 percent) and tax changes (48 percent).

Asking for professional advice

Maiorino recommends people seek professional advice when borrowing to invest, given the complexity and risks involved. An advisor can ensure the investor is properly diversified in case some of assets decrease in value over time. He also recommends seeking out tax advice should you be looking to deduct the interest on the investment loan.

“An investment may seem cheap today, only to discover that it becomes a lot cheaper in a year,” Maiorino says. “If you're not working with someone who can help you properly diversify your wealth, that’s a potential issue. Make sure you’re working with people who’ll help you build a diversified portfolio that will, ideally, insulate you from losses over the long term the best way they can.”

When it comes to investment strategies, Canadian investors agree that today's market requires flexibility and responsiveness (76 percent), with 63 percent expecting their financial advisor to offer unique investing opportunities.

In the end, the decision of whether to borrow to invest comes down to an individual's financial circumstances, needs and goals.


*Younger generations are defined as those in Gen Z, Millennials or Gen X (18-54 years old).

Leverage risk disclosure statement: Using borrowed money to finance the purchase of securities involves greater risk than using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines. 

In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.

In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.


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