Borrowing to Invest in XEQT: When Leverage Makes Sense (And When It’s a Terrible Idea)

I’ll admit it — I’ve been tempted. It was early 2024, and XEQT was sitting around $25 a share. Interest rates were still high, but everyone on Reddit was talking about how “historically, markets go up” and how borrowing to invest was “free money if your time horizon is long enough.” My bank was offering a personal line of credit at prime + 1%. I could borrow $30,000, dump it into XEQT, and pay it off over five years. The math looked beautiful on paper.

I didn’t do it. And I’m glad I didn’t — not because the market went down (it actually went up), but because I came to understand that the decision to borrow money to invest is far more nuanced than a spreadsheet can capture. The math might work in your favour 70% of the time, but the 30% where it doesn’t can set you back years.

This guide covers every form of leveraged investing available to Canadian retail investors — RRSP loans, investment loans, HELOCs, and margin accounts. I’ll explain when each one makes sense, when each one is dangerous, and give you a framework for deciding whether borrowing to invest in XEQT is right for your specific situation.

1. The Case for Borrowing to Invest (When the Math Works)

The basic argument for leveraged investing is straightforward: if you can borrow money at 5% and invest it in an asset that returns 8% on average, you pocket the 3% spread — amplified by however much you borrowed.

Over very long periods, global equity markets have returned roughly 8-10% annually. If your borrowing cost is lower than your expected return, leverage theoretically accelerates wealth building. This is the same principle that makes mortgages sensible — you borrow to buy a house because you expect the asset to appreciate faster than the cost of the debt.

Why the math is seductive:

• XEQT has returned approximately 8-9% annualized since inception
• Current interest rates on lines of credit range from 6-9%
• Investment loan interest may be tax-deductible (more on this below)
• Time in the market beats timing the market — so borrowing to invest now seems logical

Why the math lies:

• Averages aren’t guarantees. XEQT could return -20% in year one while you’re paying 7% interest
• Leverage amplifies losses just as much as it amplifies gains
• You must make loan payments regardless of market performance
• Emotional pressure during drawdowns is dramatically higher when borrowed money is at stake
• The spread between borrowing cost and expected return is historically thin right now

2. The Four Types of Investment Leverage in Canada

Not all borrowing is created equal. Here’s how the four main options compare:

RRSP Loans: The Least Risky Option

An RRSP loan is a short-term loan (usually 6-12 months) used specifically to maximize your RRSP contribution before the deadline. You borrow $5,000-$10,000, contribute to your RRSP, get a tax refund, use the refund to pay down the loan, and pay off the rest over the next few months.

When it makes sense: You have unused RRSP contribution room, you’re in a high tax bracket (30%+), and you can pay off the loan within 12 months. The tax refund effectively subsidizes the interest cost.

Example: You borrow $8,000, contribute to your RRSP, and buy XEQT. At a 35% marginal tax rate, you get a $2,800 refund. You use that to pay down the loan immediately, leaving $5,200 to repay over 10 months. Interest cost: roughly $200-300. Net benefit: you’ve invested $8,000 that will compound for decades, your refund covered a third of the loan, and the total interest paid is a rounding error compared to the long-term growth.

When it doesn’t make sense: If you can’t pay off the loan within a year, if you’re in a low tax bracket where the refund is minimal, or if you already have the cash to make the contribution (just contribute directly – no reason to pay interest when you have the money).

One thing to keep in mind: the interest on an RRSP loan is not tax-deductible. You get the RRSP contribution deduction (which generates the refund), but the loan interest itself is a cost you eat. That is why paying it off quickly matters – the longer the loan runs, the more interest erodes the benefit of the early contribution.

Investment Loans: The Dedicated Leverage Play

An investment loan is a line of credit specifically designed for investing. Banks like National Bank, Manulife, and B2B Bank offer them. You borrow a lump sum, invest it in a non-registered account, and the interest on the loan is tax-deductible (because the borrowed funds are used to earn investment income).

The tax deduction changes the math. If you’re borrowing at 7% and your marginal tax rate is 40%, the after-tax cost of borrowing is really 4.2%. Suddenly that spread between borrowing cost and expected XEQT returns looks a lot wider.

Key CRA rules for interest deductibility:

• The borrowed money must be invested in income-producing assets (XEQT qualifies because it pays distributions)
• It must be in a non-registered account — TFSA and RRSP contributions do not qualify
• You must be able to trace the borrowed funds directly to the investment
• The deduction continues even if the investment loses value, as long as you don’t sell

When it makes sense: You’ve already maxed your TFSA and RRSP, you’re in a high tax bracket, you have stable employment, and you have a 10+ year time horizon.

When it doesn’t make sense: If you still have TFSA or RRSP room (use that first — the tax advantages are better than any loan deduction), if your income is unstable, or if a 30% market drop would cause you to panic-sell.

HELOCs: Using Your Home to Invest

A Home Equity Line of Credit lets you borrow against the equity in your home at relatively low rates. Some investors tap their HELOC to make large lump-sum investments in XEQT. The interest is tax-deductible if used for investing in a non-registered account.

This is conceptually related to the Smith Manoeuvre — a specific strategy where you convert your mortgage into a tax-deductible investment loan. But using a HELOC for investing doesn’t have to follow the full Smith Manoeuvre framework.

The danger: Your home is collateral. If your investments drop and you can’t make payments, you risk your house. This turns a recoverable financial setback into a catastrophic one. A bad year in XEQT is painful but survivable. Losing your home is life-altering.

When it makes sense: Almost never for the average Canadian investor. The risk-reward ratio is unfavourable unless you have substantial other assets, a very stable income, and a genuine understanding of the worst-case scenario. If you are interested in the HELOC-as-investment-tool concept, the Smith Manoeuvre is a more structured and risk-managed approach – it gradually converts your mortgage debt into deductible investment debt without increasing your total debt load.

Margin Accounts: The Riskiest Option

A margin account lets you borrow from your brokerage to buy additional investments, using your existing portfolio as collateral. If the value of your portfolio drops below a certain threshold, you’ll receive a margin call — a demand to deposit more cash or sell investments immediately.

Margin calls are devastating. They force you to sell at the worst possible time — during a market crash — locking in losses and destroying your portfolio’s ability to recover.

When it makes sense: For sophisticated, experienced investors with large portfolios who understand the mechanics and can withstand a margin call without selling. For the average Canadian buying XEQT? Essentially never.

3. Tax Deductibility: The CRA Rules You Need to Know

The tax treatment of investment loan interest is one of the biggest reasons people consider borrowing to invest. Here’s what the CRA says:

Interest IS tax-deductible when:

• You borrow to invest in a non-registered (taxable) account
• The investment has a reasonable expectation of producing income (XEQT does — it pays quarterly distributions)
• You can trace the borrowed funds directly to the investment purchase
• The loan is used for investment purposes only (not mixed with personal spending)

Interest is NOT tax-deductible when:

• You borrow to contribute to a TFSA (TFSA income is already tax-free — no double benefit)
• You borrow to contribute to an RRSP (you get the contribution deduction instead)
• You use a cash-back credit card or personal loan without earmarking it for investing
• The investment doesn’t produce income (growth-only investments with zero distributions)

Important nuance: Even if your XEQT investment loses money, the interest remains deductible as long as you continue to hold the investment. The CRA cares about the purpose of the borrowing (to earn income), not the outcome.

The “disappearing source” trap: If you sell your XEQT and use the proceeds for personal spending while keeping the loan outstanding, the CRA may argue the income source has “disappeared” and deny the ongoing interest deduction. If you sell, use the proceeds to either pay off the loan or reinvest in other income-producing assets.

How to claim it: Report investment loan interest on Line 22100 of your tax return as a carrying charge. Keep your loan statements and brokerage statements organized – you need to be able to show the direct link between the borrowed money and the investment if the CRA ever asks.

Record-keeping best practices:

• Keep a dedicated brokerage account for leveraged investments (do not mix with personal savings)
• Transfer borrowed funds directly from the loan to the brokerage – never run them through a personal chequing account where they could be mixed with other money
• Save annual interest statements from your lender
• Maintain a simple log linking each loan draw to a specific XEQT purchase date and amount

4. When Borrowing to Invest Makes Sense: The Checklist

Borrowing to invest in XEQT may be appropriate if all of the following are true:

• You’ve maxed out your TFSA contribution room
• You’ve maxed out your RRSP contribution room (or have a strategic reason not to contribute)
• You have a fully funded emergency fund (3-6 months of expenses)
• You have no high-interest debt (credit cards, car loans, personal loans)
• Your income is stable and sufficient to make loan payments even if your investments drop 30%
• You’re in a marginal tax bracket of 30% or higher (to benefit from interest deductibility)
• Your investment time horizon is 10+ years
• You can genuinely stomach watching borrowed money lose value during a market downturn
• You understand that leveraged losses are real and you may end up worse off

If even one of these doesn’t apply, borrowing to invest is almost certainly not right for you. And that’s fine. There’s nothing wrong with investing what you already have.

5. When Borrowing to Invest Is a Terrible Idea

Let me be direct: for most Canadians, borrowing to invest is unnecessary and risky. Here’s when it’s actively dangerous:

• You still have TFSA or RRSP room. The tax-free compounding in a TFSA and the tax deduction from an RRSP are almost always superior to the interest deduction from a leveraged investment. Use your registered accounts first.
• You have consumer debt. Paying 19% on a credit card while earning 8% on XEQT is negative leverage. Pay off the debt first.
• Your income is unstable. Freelancers, gig workers, and people in volatile industries should not take on investment debt. Loan payments don’t pause because your income drops.
• You can’t sleep through a 30% drawdown. Watching $30,000 of your own money drop to $21,000 is unpleasant. Watching $30,000 of borrowed money drop to $21,000 while you’re still making interest payments is psychologically crushing. Many people sell at the bottom.
• You’re chasing returns. If you want to borrow because the market has been going up and you want to catch the wave, that’s FOMO, not strategy.
• You’re comparing yourself to people on Reddit or YouTube. Survivorship bias is real in leveraged investing discussions. The people who borrowed $100,000 to invest and saw their portfolio crash 40% are not posting about it. The ones who got lucky during a bull run are very loud. Do not mistake a handful of success stories for evidence that the strategy works for everyone.

6. The Math: What Leverage Actually Does to Your Returns

Let’s run three scenarios. You invest $50,000 in XEQT — either $50,000 of your own money or $25,000 of your own money plus $25,000 borrowed at 7% interest (4.2% after tax deduction).

Scenario A: Market Returns 10%

Leverage boosted your return on invested capital from 10% to 15.8%. Not bad.

Scenario B: Market Returns 0%

In a flat year, leverage costs you $1,050. You lost money on an investment that went nowhere.

Scenario C: Market Drops 20%

In a down year, leverage nearly doubled your loss. Your $25,000 of personal equity dropped to $14,950 – a 40%+ loss. This is where most leveraged investors panic-sell, locking in losses they can never recover from.

And remember: a 44% loss requires an 80% gain to break even. That could take years – all while you continue making interest payments on the loan. The psychological toll of that is real and well-documented. This is fundamentally different from the volatility drag you see with leveraged ETF products – those have structural decay built in. Borrowing to buy regular XEQT avoids the structural problems, but the emotional and financial weight of investing with debt introduces its own set of dangers.

7. A Decision Framework: Should YOU Borrow to Invest?

Run through this framework honestly:

Step 1: Have you exhausted tax-advantaged accounts? If you have ANY unused TFSA or RRSP room, stop here. Contribute to those first. The guaranteed tax benefits beat the speculative gains from leverage every time.

Step 2: Are you debt-free (except mortgage)? Consumer debt at high interest rates destroys the leverage thesis. Pay it off first.

Step 3: Do you have 12+ months of expenses in an emergency fund? Leveraged investing with no safety net is gambling with extra steps.

Step 4: Can you afford payments during a 40% drawdown? Not hypothetically — actually. Run the numbers. Can you make interest payments for two years while your portfolio is deeply underwater? If the answer causes hesitation, leverage isn’t for you.

Step 5: Is your time horizon 10+ years? Leverage only works if you can ride out multiple market cycles. If you might need this money in 5 years, don’t borrow.

If you answered “yes” to all five: Borrowing to invest may be appropriate for you. Start with a small RRSP loan to test how you handle the psychology of investing with borrowed money. If that goes well, you can explore larger investment loans later.

If you answered “no” to any: Skip leverage entirely. Just invest what you have, consistently, in XEQT. You’ll build significant wealth without the additional risk.

8. The Safer Alternative: Just Invest What You Have Consistently

Here’s the truth that the leverage conversation often obscures: most Canadians don’t need to borrow to invest. They need to invest what they already have, consistently, for a long time.

Consider the numbers:

• $500/month for 30 years at 8%: ~$680,000
• $1,000/month for 30 years at 8%: ~$1,360,000
• $1,500/month for 30 years at 8%: ~$2,040,000

A Canadian who invests $500/month in XEQT from age 25 to 65 – no leverage, no tricks, no complicated strategies – ends up with roughly $1.5 million at an 8% average return. That is $240,000 of contributions and over $1.25 million of compound growth.

You do not need leverage to get there. You need patience and consistency. If you have not already maxed out your TFSA and RRSP, if you have not automated your XEQT purchases, if you are not taking full advantage of any employer matching – those zero-risk optimizations should be fully exhausted before you even think about borrowing.

Borrowing to invest is a tool. Like any tool, it can be used well or used badly. But unlike most investing mistakes — which are recoverable — leveraged losses can create debt spirals that take years to escape. The asymmetry of outcomes means you should only consider leverage when the basics are locked in: maxed registered accounts, zero consumer debt, robust emergency fund, stable income, and the psychological resilience to watch borrowed money lose value without flinching.

For everyone else — and that’s most of us — the winning strategy remains beautifully simple. Buy XEQT. Buy it regularly. Buy it automatically. Let time and compounding do the heavy lifting.

Related Articles

• The Smith Manoeuvre and XEQT: Converting Your Mortgage Into a Tax-Deductible Investment
• XEQT vs Leveraged ETFs in Canada: Why 2x and 3x Products Destroy Portfolios
• Pay Off Debt or Invest in XEQT? How to Decide in Canada
• Emergency Fund vs Investing in XEQT: How to Balance Both