INVESTOR INSIGHTS

2026

How Smart Investors Leverage Up:
The Institutional Approach to Responsible Borrowing

For many investors, leverage triggers an emotional reaction that has very little to do with arithmetic. It sounds risky. It feels speculative. It carries the baggage of margin call folklore and stories of people who borrowed too much, on the wrong assets, at the wrong broker. But most of that fear is psychological rather than financial.

Ironically, the same investors who instinctively fear leverage are often meticulous about tax efficiency. New clients routinely ask how to minimize taxes, which is exactly the right instinct. Almost no one asks about financial efficiency. People think carefully about how their portfolio is taxed and never about how it is funded. It shows how deeply ingrained the behavioural bias is. Individuals do not think in terms of capital structure, even though institutions, pension funds and corporations treat it as foundational. That is a missed opportunity.

In everyday life, Canadians take on far more leverage without hesitation. A $300,000 down payment on a $1.5 million home leaves $1.2 million of debt sitting against $300,000 of equity. That is four dollars borrowed for every dollar of equity, an 80 percent loan to value, secured against a single illiquid asset on a single street. It is considered prudent, responsible, even conservative. No one calls it speculation. No one panics when the mortgage statement arrives. We accept real estate leverage because it is familiar, socially normalized, and framed as a necessity of home ownership.

INVESTOR INSIGHTS

2026

Yet borrowing 15 to 20 percent against a diversified portfolio of quality assets somehow feels dangerous. The disconnect is behavioural, not mathematical. Portfolio leverage feels unfamiliar, and unfamiliarity gets mislabeled as risk. It also carries a cultural stigma, since leverage in markets is associated with greed or recklessness even when it is used responsibly.

Just as we work to build portfolios that are tax efficient, we should work to build portfolios that are capital efficient. Optimizing your capital structure by taking advantage of low borrowing rates, especially in the current interest rate environment, is simply good financial sense. Many investors are missing that advantage because they are reacting emotionally rather than mathematically.

A Simple Metaphor: Your Portfolio Is a Business

Imagine your portfolio as a business.

A well run business does not say, “We will never borrow under any circumstances.” That would be financially inefficient. If a business can borrow at 3 to 4 percent and reinvest in projects earning 7 to 10 percent, then refusing to borrow is not just conservative. It is wasteful.

Your portfolio is no different. The underlying mechanics are identical: borrow at one rate, invest in an asset with a higher expected return, and allow time, dividends and compounding to do the work.

Why Broker Choice Matters

Leverage works best when borrowing costs are low. When margin interest rates are high, the math breaks down. The hurdle rate rises, and that is where most investors get burned. A higher borrowing cost means your investments have to earn more just to break even, which turns what should be a strategic advantage into a structural handicap.

INVESTOR INSIGHTS

2026

Over the next few days I will publish a companion piece showing what Canada’s major banks actually charge their direct investing clients on margin. For now, it is enough to say that Frontwater uses one of North America’s most respected custodial brokers, the same platform used by institutional and professional hedge funds: Interactive Brokers.

Leverage becomes efficient when the cost of borrowing is low enough to be absorbed by dividends, premium income and long term market returns. At IBKR the Canadian dollar margin rate is tiered. The first C$130,000 is financed at 3.631 percent and the next tier at 3.131 percent, so the more an investor borrows, the lower the effective rate becomes. Borrow C$500,000 and the blended rate works out to roughly 3.26 percent, or about C$16,300 a year in interest.

The major Canadian banks charge their direct investing clients between 6.00 and 6.50 percent on Canadian dollar debit balances. On that same C$500,000 the interest cost runs C$30,000 to C$32,500 a year. The difference is roughly C$14,000 annually, every year, on identical borrowing against identical assets. That gap is the line between leverage as a tool and leverage as a trap. It should come as no surprise that the banks publish these rates several clicks deep on their websites.

Practical Examples of Leverage

Consider two Canadian REITs that I currently own, both personally and for Frontwater clients, using modest leverage.

INVESTOR INSIGHTS

2026

At these levels, patience is rewarded. The distribution yield on both positions more than offsets my interest cost at IBKR, even at the highest tiered rate of 3.631 percent. As long as two conditions hold, that the payout remains stable and that borrowing rates do not spike the way they did through 2022 and 2023, I have no issue holding these positions indefinitely. The yield covers the carry.

I want to be direct about the risk in the CAPREIT position rather than gloss over it. The Canadian REIT sector has been punished for several years, and CAPREIT has been punished harder than most. It was once a market darling. It traded above $62 in the autumn of 2021 and sits near $33 today, roughly 47 percent below that peak and within a few percent of its 52 week low. Nothing in the price action says the decline has finished.

My view is that the sector eventually recovers. CAPREIT owns real, tangible bricks and mortar assets, and fundamentals ultimately reassert themselves. It may take one year, three years, five years or longer for the units to revisit the $45 range, which would require a gain of about 36 percent from here. The underlying real estate is not going anywhere. In the meantime the carry on the position, meaning the difference between the distribution yield and my borrowing cost, is roughly 1 percent using modest leverage at IBKR. That makes waiting not merely tolerable but financially efficient.

That last point deserves emphasis, because it is the whole argument. Positive carry is what converts a waiting period into a paid one. Without it, a leveraged position in a falling asset is a bleeding position and the pressure to sell at the bottom becomes overwhelming. With it, time works for you instead of against you.

What Responsible Actually Means on the Downside

None of this works without a plan for the bad scenario, so it is worth being explicit about what discipline looks like in practice.

INVESTOR INSIGHTS

2026

Borrow modestly. A loan to value in the 15 to 20 percent range leaves enormous room before a margin call becomes a live question. Run the arithmetic on a severe decline before putting the position on, not after. A portfolio at 20 percent loan to value can absorb a 40 percent market drop and still hold a substantial margin cushion, which is precisely why the position size is chosen first and the strategy second.

Borrow against assets that pay you. The carry has to be positive or the entire structure depends on price appreciation, which is exactly the assumption you cannot afford to make in a drawdown.

Do not set an arbitrary trigger. Deleveraging decisions should reflect actual margin cushion and actual market conditions, not a fixed ratio pulled from a spreadsheet. A rule that forces selling at the bottom is not risk management. It is scheduled capitulation.

The Institutional Lesson

This is the essence of responsible leverage. It is not about speculation. It is about capital efficiency, which means borrowing modestly, at low cost, against quality assets that generate enough income to cover the carry. It is the same discipline that large pension funds, institutions and corporations apply every day.

Individual investors can do exactly the same thing, provided they think like institutions rather than react like retail.