Home -> Financial Planning -> Stocks, Bonds etc. -> Borrowing to Invest in Stocks
Borrowing to Invest in Stocks and Exchange Traded Funds (ETFs)
- Outside of an RRSP
Borrowing to Invest is Not for Novice Investors
Interest Rates and the "Spread"
Interest Expense Not Always Deductible
Borrow to Invest Calculator - check out different scenarios by inputting different borrowing rates, rates of return on investments, and other data.
Borrowing to Invest is Not for Novice Investors
You should not consider this strategy unless you have owned stocks for many years. We recommend this because investing is a learning experience, and you may make more mistakes when you are just starting out. These mistakes are magnified if you borrow to invest, because you will have more money invested. At times the stock market is very volatile, and if you have no experience you may panic and make bad decisions. Individual stocks and ETFs will rise and fall continually, and the whole portfolio will suffer a large drop (10% to 20%) approximately once a decade. For more on this, please read our article Risk as it Relates to Investing.
Interest Rates and the "Spread"
Naturally, the rate of interest as well as the dividend yield are both considerations in your decision on borrowing to invest. The borrowing rates from your bank or the margin borrowing rates from your brokerage will be higher than the Bank of Canada (BOC) rates - the difference between these rates is called the spread. If you have significant funds in investments with your brokerage, you may be able to negotiate a lower loan rate or margin rate.
Supply and demand determines the prices of most things, including interest rates. If there is a high demand for money, the spread will usually increase. If there is a low demand for money, the spread will decrease.
Our Strategy
We started to borrow to invest in the early 1990s. We changed our strategy and were trading options from 2001 to 2007, but finally decided they were a lot of work for not very much money. We again started borrowing to invest in 2008, on margin. In 2023, we reduced the debt due to the high margin rate and other factors. We still buy on margin for stocks with a fairly good yield and/or room to grow. At certain times when stocks seem to be too expensive (price/earnings etc), we sell some to reduce our debt. We mainly borrow to invest in blue-chip Canadian stocks that pay eligible dividends.
Getting Started
Hopefully you have already bought stocks and ETFs in your RRSP, and have become comfortable owning them. If you have no debt, your next step could be to borrow to invest in stocks and ETFs in a non-registered account.
If you have debt, it still might be a good idea to borrow to invest. However, you will have to do some financial analysis to make sure you do not overextend yourself. If you are worried about taking on too much debt, it would be better to either
 | borrow VERY slowly, or |
| don't borrow until you have all your non-tax-deductible-debt paid off. |
When you borrow to invest in Canadian stocks that pay eligible dividends, you are converting regular income, which is fully taxed, into Canadian dividends and capital gains, which are taxed at lower rates and/or allow you to defer tax. The advantages of borrowing to invest in stocks and ETFs are
| interest expense is deductible, reducing your regular income, which is fully taxed. Note that if a corporation has a stated policy that it will not pay dividends, interest on funds borrowed to buy shares of that corporation will not be deductible. |
| dividends from Canadian corporations are taxed at low tax rates. |
| only 50% of capital gains are taxed for individuals, unless you have over $250,000 in capital gains in a year (after June 24, 2024). |
| capital gains are not taxed until investments are sold, so if the investments are held forever there is no tax until death. |
| investments in stocks are liquid, easy to sell if necessary. |
Interest Expense Not Always Deductible
In most cases, the interest on the debt is only tax deductible as long as you own the stocks. See our article regarding Interest Expense on Investments, and the complication regarding return on capital if you borrow to invest in mutual funds or exchange traded funds (ETFs).
Keep Excellent Records!
Record-keeping is quite important with this. You cannot write off interest if the debt is more than the cost of the stocks, unless the additional debt is incurred to pay interest on the initial investment loan. See Compound Interest in our Interest Expense on Investments article.
You also have to be able to sleep at night! If borrowing to invest keeps you awake at night, it is not for you!!
Be cautious, don't overextend yourself, invest in good quality stocks and ETFs.
Don't borrow to invest if you are novice investor!
Each person's financial and tax situation differs. One solution is not best for everyone. Use the resources on TaxTips.ca to help determine the best plan for you.
Get professional tax and financial planning advice!
Borrow to Invest Articles
Setting up the brokerage account
TaxTips.ca Resources
Interest Expense and Other Investment Expenses
Borrow to Invest calculator - check out different scenarios by inputting different borrowing rates, rates of return on investments, and other data.
Recommended stocks (ETFs) for inside or outside of your RRSP - for Novice Investors
Recommended portfolio for Canadian stocks in a non-registered account
How to get money out of RRSPs/RRIFs tax free (sort of), which also uses the strategy of borrowing to invest.
Revised: September 20, 2024