Should You Borrow to Invest? Risks and Rewards

A guide to leveraged investing in New Zealand, including the tax angle most investors miss.

In short: borrowing to invest can significantly accelerate wealth for New Zealanders with stable income, a long time horizon, and the discipline to ride out market volatility. It is not suitable for most people, and the tax, structural, and behavioural details matter enormously. Here's what you need to know.

Mention borrowing money to invest and you'll usually receive looks of shock or confusion. If the shock doesn't land, someone will inevitably quote billionaire investor Warren Buffett, who once said:

"I've seen more people fail because of liquor and leverage – leverage being borrowed money. You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing."

Sound advice for most people. But Buffett built Berkshire Hathaway using decades of insurance float, which is effectively other people's money at a negative cost. The advice he gives retail investors and the methods he uses are not entirely aligned. So could borrowing to invest sometimes be a sound move for ordinary New Zealanders? Let's look at the maths, the tax position, and the risks.

What Is Leveraged Investing?

Leveraged investing means using borrowed money to buy assets. Your profit (or loss) comes from the difference between your investment return and the cost of the debt. If a portfolio returns eight percent and the loan costs five percent, the three percent spread is working in your favour, amplified across every borrowed dollar.

The concept isn't exotic. Most New Zealanders already do it when they buy a home. A first home buyer putting down a 20 percent deposit is leveraged at five to one. Property investors using equity from their home to buy a rental are doing it too. The difference is property borrowing is so normalised nobody flinches. Apply the same principle to shares, managed funds, or a business, and suddenly it feels reckless. The logic is identical. The discomfort is cultural.

The Spread: Where the Maths Gets Interesting

The core question with leveraged investing is whether the expected return on your investments exceeds the after-tax cost of borrowing. If it does, leverage accelerates your wealth. If it doesn't, leverage accelerates your losses.

Consider a worked example. Suppose you borrow $200,000 against the equity in your home at a fixed rate of 5.00 percent. Your annual interest cost is $10,000. You invest the $200,000 into a diversified portfolio of shares and managed funds. Over the long term, global equities have returned roughly eight to ten percent per annum, though with significant variation year to year.

If the portfolio returns eight percent in a given year, you earn $16,000. Your interest cost is $10,000, but because the borrowing is used to produce taxable income, the interest is tax-deductible. For someone on the 33 percent marginal tax rate, the after-tax cost of the interest drops to approximately $6,700. Your net gain, before tax on the investment income itself, is around $9,300 on money you didn't have.

Over 10 years, with compounding, the effect is substantial. Without leverage, $200,000 of your own capital at eight percent grows to roughly $432,000. With leverage, you've deployed $400,000 (your $200,000 plus $200,000 borrowed), and even after servicing the debt, your net position is significantly stronger.

One important caveat: the spread can compress or even invert. If borrowing costs rise to seven percent while investment returns dip to five percent, leverage is working against you. This is not a plan for money you need in the next five to seven years, and it requires ongoing monitoring.

Tax Benefits of Debt: The Angle Most Investors Miss

Here's where it gets genuinely interesting for NZ investors, and where borrowing to invest in shares and managed funds holds a quiet advantage over property.

The Inland Revenue Department (IRD) says:

"You can claim interest on money you've borrowed to buy shares or to invest, as long as that investment will produce taxable income."

The critical phrase is "taxable income." This applies to shares paying dividends, non-PIE managed funds, and most other income-producing investments. If the investment produces a loss in a given year, the interest expense adds to the loss, which can be carried forward.

A word of caution for anyone investing through a Portfolio Investment Entity (PIE), which includes most KiwiSaver Schemes and many NZ managed funds: income from a multi-rate PIE is generally treated as excluded income. If the income is excluded, the interest on the borrowing may not be deductible against it. This is a genuine trap for investors who assume all fund structures are equal. The tax treatment depends on the structure of the fund, not just the underlying assets, so specific tax advice is essential before committing.

Now compare all of this with residential property investment. Since 1 April 2025, full interest deductibility has been restored for rental properties. An investor with a $600,000 mortgage on a rental can once again claim 100 percent of the interest against rental income. However, the residential rental loss ring-fencing rules remain firmly in place. If your rental expenses (including interest) exceed your rental income, the resulting loss is ring-fenced: you cannot offset it against your salary, wages, or business income. The loss sits there, carried forward, only usable against future rental income from property investments.

Joseph Darby, CEO of Become Wealth, sees this play out regularly:

"We have clients, and staff for that matter, sitting on hundreds of thousands of dollars in ring-fenced tax losses from their property portfolios. The losses accumulate and they can't use them to reduce their other income. Meanwhile, someone who borrows to invest in shares or a non-PIE managed fund doesn't face the same ring-fencing constraint. It's one of the less discussed quirks of the NZ tax system, and worth understanding before you decide which form of leverage suits you."

This doesn't mean property is a bad investment. It means the tax treatment of losses works differently depending on the asset class, and for high-income earners already carrying rental losses, borrowing to invest in shares can be more tax-efficient.

Debt Recycling: Turning Your Mortgage Into a Wealth-Building Tool

For homeowners sitting on equity, debt recycling may be the most practical form of leveraged investing available.

The concept is straightforward. Rather than simply paying down your home loan, you redraw against the equity you've built and invest the funds into income-producing assets. The interest on the redrawn portion becomes tax-deductible (because it's now used for investment purposes), while the non-deductible home loan shrinks. Over time, you're converting bad debt into good debt without necessarily increasing your total borrowing.

Suppose you have a $700,000 home worth $1.1 million. You've built $400,000 in usable equity. Rather than letting it sit idle, you borrow $200,000 against it and invest. The interest on the $200,000 is deductible. Your home loan balance hasn't changed in total, but the composition of your debt has shifted in your favour.

One practical detail: this requires the right loan structure. A blended home loan won't work. You need a separate, traceable loan facility for the investment borrowing so the IRD can see a clear line between your private home loan and your investment debt. A good mortgage adviser can set this up. (In fact, getting the structure wrong is one of the most common and avoidable mistakes we see.)

The goal isn't to have zero debt. The goal is to have the highest possible net worth. A household with a $500,000 mortgage and $1,000,000 in diversified investments is significantly wealthier, and more liquid, than a household with a paid-off $700,000 home and nothing else.

Shares and managed funds also offer something property doesn't: partial liquidity. If cashflow gets tight, you can sell $10,000 of fund units in a day or two. You can't sell five percent of a rental property. For investors worried about being asset-rich and cash-poor, this flexibility is a genuine advantage. (It's also a remarkably common condition among New Zealand retirees, which is worth thinking about well before retirement.)

We've written a full deep dive on how debt recycling works in New Zealand, including the mechanics, the risks, and the tax position.

Inflation: The Silent Tailwind

Inflation is typically cast as the villain, but for borrowers it can be an ally. If you borrow $200,000 and inflation runs at three percent over the following year, the real value of your debt drops to roughly $194,000 without you repaying a cent. The dollars you repay in future are worth less than the dollars you borrowed.

New Zealand's annual CPI inflation sits at around three percent as of late 2025. Even modest inflation steadily erodes the real burden of fixed-rate debt, which is one reason long-term borrowers often fare better than the interest payments alone suggest. It's also why savers who keep too much cash in the bank are quietly going backwards after inflation and tax. (We explored this further in Cash Is Trash.)

Think Like a Business

Nearly every successful company on earth uses leverage. Apple, Google, and Microsoft all borrow billions despite sitting on mountains of cash, because the after-tax cost of debt is lower than the return they generate by deploying the capital. If borrowing at four percent lets you invest at ten percent, the maths works whether you're a multinational or a salaried professional in Auckland.

Benjamin Graham, widely considered the father of value investing, put it well: "The essence of investment management is the management of risks, not the management of returns." The same principle applies to personal leverage. The question isn't whether to borrow. It's whether you can manage the risk if you do.

Treating your personal finances like a business means asking the same questions a CFO would. What's the after-tax cost of this capital? What return can I reasonably expect over my time horizon? What's my margin of safety if conditions deteriorate? Am I diversified enough to survive a bad year? If you can answer those confidently, you're in the territory where leverage can work for you. If this kind of thinking appeals to you, a proper financial plan is the place to start.

The Risks: Why Borrowing to Invest Isn't for Everyone

None of the above changes the fact leverage amplifies losses just as readily as gains. A 20 percent market fall wipes out 20 percent of your invested capital, and if half was borrowed, the loss comes entirely out of your equity. You still owe the bank.

It's also important to distinguish between borrowing against home equity and margin lending through a broker. A home equity facility won't be "called" if markets drop 30 percent; your repayment schedule stays the same regardless of what your investments are doing. A margin loan can trigger a margin call, forcing you to sell assets at the worst possible time or inject more cash to meet the lender's requirements. Most of the horror stories about leveraged investing involve margin calls, not home equity borrowing.

Borrowing to invest requires:

• Strong and steady cashflow. You need to service the debt regardless of market conditions. Losing your job while leveraged into a falling market is a genuinely awful position.
• A long time horizon. A minimum of seven to ten years is a reasonable starting point. You need enough runway for compounding to outrun the cost of debt and enough time to recover from drawdowns.
• Discipline under pressure. Panic-selling a leveraged position during a downturn locks in losses and eliminates the chance of recovery. If the 2020 COVID crash or the 2022 correction would have kept you up at night, leverage probably isn't for you.
• A genuine understanding of your risk tolerance. Not the sunny-day version. The 2am version, when your portfolio is down 25 percent and the news is universally terrible.

Run an investment stress test before committing. Model what happens if rates rise two percent while markets fall 30 percent. If the answer makes you uncomfortable, dial back the leverage or skip it entirely.

And crucially: if you're already well on track to achieve your major life goals, you may not need leverage at all. Borrowing to invest is a tool, not a requirement. Plenty of people reach financial independence without it.

Frequently Asked Questions

Is it a good idea to borrow to invest in New Zealand?

It can be, for the right person. You need stable income, a long investment horizon (ideally seven years or more), tolerance for volatility, and enough cashflow to service the debt comfortably even if markets fall. It is not suitable for most people, and professional advice is essential.

Can you claim interest on money borrowed to invest in NZ?

Yes, provided the investment produces taxable income (such as dividends from shares or distributions from a non-PIE fund). Be careful with PIE funds: income from a multi-rate PIE is generally excluded income, which may mean the interest is not deductible. The IRD allows deductions on money borrowed to invest, but the fund structure matters. Get specific tax advice, the rules can be complex.

What is debt recycling?

Debt recycling involves borrowing against your home equity to invest in income-producing assets. The non-deductible home loan is effectively converted into tax-deductible investment debt, without necessarily increasing your total borrowing. It requires a separate, traceable loan facility. Read our full guide to debt recycling.

Is borrowing to invest the same as margin lending?

No. Most Kiwis who borrow to invest do so against home equity, where the lender cannot force a sale if asset values drop. Margin lending through a broker is different: if your portfolio falls below a certain threshold, the lender can issue a margin call, requiring you to sell assets or deposit additional cash immediately. The risk profiles are very different.

What are the biggest risks of leveraged investing?

The main risks are: investment losses amplified by borrowed capital, rising interest rates increasing the cost of debt, the need to service repayments regardless of market conditions, and behavioural risk (panic-selling during a downturn). A sudden loss of income while leveraged is particularly dangerous.

The Bottom Line: Borrow to Invest

Borrowing to invest is one of the most powerful tools available for building long-term wealth. It's also one of the easiest ways to get into serious financial trouble if misused. The difference comes down to preparation, discipline, and making sure the maths works before you sign anything.

If you're a homeowner with equity, stable income, and a long time horizon, leveraged investing deserves serious consideration, particularly through debt recycling. The tax position for borrowing to invest in shares and managed funds is genuinely favourable in New Zealand, and for many people it's a faster path to financial freedom than paying off the mortgage and hoping for the best.

Not sure where to start? Here's how we work with clients, or get in touch for a no-obligation conversation about whether leveraged investing belongs in your plan.