Should you borrow to invest in shares?

Does it make sense to borrow to invest in ASX shares?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Would it make sense to borrow to invest in ASX shares?

The big banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) love to lend to property investors.

But there seems to be much less appetite for borrowing for shares. Shares are more volatile and harder to understand and harder to create a uniform lending criteria for. 

Leverage is the biggest reason why property returns can look so good to people. So why not do the same thing with shares? In percentage terms, shares have proven to be the best performing asset, think how good it would be if you could supercharge that with leverage?

Well, there are several reasons to be cautious about borrowing for shares.

A lot of loans that could be used to invest in shares have a much higher interest rate than a mortgage. Shares may have returned an average of 10% per annum over the long-term and the loan interest rate may be lower than that, but don't forget you probably have to pay tax on the capital gains you make and dividends you receive. It may not even be worth it financially unless you're a great stock picker. 

Life doesn't work like a spreadsheet. Sometimes there are recessions and market crashes. This can be terrible if you have something like a margin loan and you're forced to sell at precisely the wrong time.

Loans can magnify both the gains and the losses.

Of course, if you borrow and invest in the right shares and at the right time then it can work out really well. Imagine if you could borrow and invest during the GFC! But borrowing comes with risks, you need to make the repayments and it's possible you may borrow too much. 

Foolish takeaway

Whilst borrowing for shares may make sense on a spreadsheet, I'd much rather stay debt free and just invest cash into ASX shares.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Personal Finance

three businessmen high five each other outside an office building with graphic images of graphs and metrics superimposed on the shot.
Personal Finance

3 personal finance tips to help anyone grow richer

Our portfolios can do better with the right financial foundations.

Read more »

Businesswoman whispering in male colleague's ear as he looks surprised
Investing Strategies

5 secrets of ASX millionaires

Wealthy people come in all sorts of shapes and sizes, but they all have some common habits that we could…

Read more »

Three generations of male family members enjoy the company as they plan future financial goals together on a trek outdoors.
Personal Finance

Is 60 too old to start buying ASX shares?

It's never too late to benefit from the wonders of the share market.

Read more »

Woman and man calculating a dividend yield.
Personal Finance

Becoming a millionaire: Why savings accounts aren't the answer

Even high-interest savings accounts can't compete with the returns of ASX shares.

Read more »

Tiger staring with a black background.
How to invest

How to make 7% interest while deciding which ASX shares to buy

Also receive Tesla stock for your trouble of just sitting around.

Read more »

Two people comparing and analysing material.
Personal Finance

How does investing in a term deposit compare with buying ASX shares?

Term deposits look attractive for income, but do they beat ASX shares?

Read more »

Woman with headphones on relaxing and looking at her phone happily.
Personal Finance

How quickly could I build a $30k annual passive income with ASX shares?

The stock market can deliver great yields.

Read more »

Woman smiling with her hands behind her back on her couch, symbolising passive income.
Personal Finance

5 ways to get richer in 2024 without a pay rise

You don't need a pay rise to build your wealth in 2024.

Read more »