How leverage can help you build wealth

Borrowing to invest can magnify the returns on assets. Here’s how it works.



From the magazine.


Interested in using leverage to boost your returns? We have news for you: if you have a mortgage, then you’re already doing it. Buying a home is one of the best uses of leverage, says Al Feth, a fee-only adviser in Toronto. “Your gain will be tax-free and you won’t become as emotionally affected in times of market downturns.”

Let’s say you saved $50,000 and you want to buy a condo for $250,000. To make up the difference you borrow $200,000 in the form of a mortgage. If the value of your condo rises by 33% over the next five years, it will be worth $332,500. That’s a great return. But remember, you only put $50,000 down in cash. So, if you sold your condo for $332,500, you’d walk away with $82,500 in cash, for a gain of $32,500 on your original investment. That’s a 65% return. Of course, you’d still have all of the transactional costs involved in buying and selling your home, so you wouldn’t get the full 65% return, but it’s a good illustration of how leverage works.

“The best part is that the entire gain will be completely tax-free,” says Jason Heath, a fee-only certified financial planner with Objective Financial Partners in Toronto. “Other than perhaps investing in your education, you really couldn’t make a better leveraged investment than this.”

Borrowing to invest in stocks works in much the same way, but the risk you take on is far higher. If you want to use leverage to increase your investment returns, be sure to consult a tax expert as well as your adviser before borrowing any money.

3 comments on “How leverage can help you build wealth

  1. Leverage works well in rising markets but is a disaster in declining markets…including real estate. Ask the average American homeowner if they are happy they leveraged their home. When US property values dropped most were wiped out leaving a huge crater in the housing market. The US market may not recover for 5 or 10 years if at all. Best to avoid leveraging completely except to buy an owner occupied home that you intend to live in for a long time. Buy a house you can afford with a mortgage you can manage.


  2. Suggesting any kind of leveraging at a time of a potential real estate bubble and during worldwide investment market volatility is asinine.

    Most participating in this kind of activity today are those who really have never experienced what has happened historically.


  3. Whether leverage makes sense depends on the circumstances. Like most things financial there is not one right answer that can be applied to all cases. Leverage investing for speculation is only advisable for those who can emotionally accept and financially take on the risk. Leverage investing considered as part of a risk managed strategy may make sense. For example, if you have an investment portfolio and a home mortgage it may, in the right circumstances, make sense to liquidate the portfolio, use the proceeds to pay down your mortgage, borrowing the proceeds (e.g., through a HELOC) and repurchasing the portfolio holdings using the borrowed funds. The interest charged on the funds is tax deductible if the funds are invested in income producing securities. Of course all the numbers need to work.


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