Leverage Investing Calculator

What Is Leverage Investing?

Leverage investing means borrowing money to invest. Instead of investing only your own capital, you combine your equity with borrowed funds to increase the total amount invested. In Canada, the interest paid on money borrowed for investment purposes is tax-deductible, which can reduce the effective cost of borrowing.

How Leverage Amplifies Returns (and Losses)

Leverage acts as a multiplier on both gains and losses. With a 2:1 leverage ratio (borrowing an amount equal to your equity), a 10% market gain becomes approximately a 20% gain on your equity (minus interest costs), but a 10% market loss becomes roughly a 20% loss on your equity (plus interest costs). The key formulas are:

• Leverage Ratio = Total Invested / Equity = (Equity + Borrowed) / Equity
• Leveraged Return = (Market Return x Leverage Ratio) - (Borrow Rate x (Leverage Ratio - 1))
• Volatility Amplification = Market Volatility x Leverage Ratio
• Max Drawdown Estimate = Typical Market Drawdown x Leverage Ratio
• After-Tax Borrow Cost = Borrow Rate x (1 - Marginal Tax Rate)

Canadian Tax Advantages

Under CRA rules, interest paid on money borrowed to earn investment income is generally tax-deductible (Line 22100 - Carrying Charges and Interest Expenses). This means a portion of your borrowing cost is effectively subsidized by the government, improving the economics of leverage investing.

Key Risks to Understand

• Margin calls: If your investments decline enough, your lender may force you to add more capital or sell at a loss.
• Forced selling: During market downturns, leverage can force you to sell at the worst possible time.
• Amplified losses: A 50% market drop with 2:1 leverage means a 100% loss of your equity.
• Psychological pressure: Watching leveraged losses can lead to panic selling and poor decision-making.
• Interest rate risk: Variable-rate loans can increase costs when rates rise.

Historical Context

The S&P/TSX Composite has returned approximately 8-10% annually over the long term, but with significant year-to-year variation. Individual years have ranged from roughly -33% (2008) to +30%+. Leverage amplifies this volatility, making time horizon and risk tolerance critical factors.

Who Should Consider Leverage Investing?

• Investors with a long time horizon (15+ years) who can ride out downturns
• Those with high risk tolerance and stable, ongoing income
• People who have maximized RRSP and TFSA room and are looking for additional strategies
• Individuals with a strong emergency fund and no high-interest consumer debt