Is it wise to use leverage?

Borrowing against a portfolio is a form of leverage, and whether it is wise depends on purpose, size, and discipline rather than on the tool being good or bad in itself. Used to raise liquidity without selling, kept conservative, and matched to a clear need, it can be prudent; taken to the maximum, without purpose, or against fragile collateral, it is not. This is general information, not advice.

What leverage really is

Leverage means using borrowed money to hold more assets, or to free up cash, than your own capital alone would allow. When you borrow against a portfolio through a Lombard loan, you are levered: the portfolio still belongs to you and stays invested, but a loan now sits against it. The question is not whether leverage is dangerous in the abstract — every mortgage and every corporate balance sheet uses it — but whether a particular use of it is proportionate to its purpose. Framed that way, “is it wise?” has no single answer; it has conditions.

The legitimate cases

The sound uses of portfolio leverage share a common feature: the aim is to stay invested, not to speculate. The first is raising liquidity without selling — meeting a cash need while keeping the portfolio, and its long-term compounding, intact. The mechanics of that are set out in the note on how to borrow against shares without selling. The second is deferring a disposal: bridging to a better moment to sell, or avoiding a sale that would crystallise a tax charge at an inopportune time. The third is funding an opportunity or an existing commitment — a capital call, a property completion, a business need — while the invested assets remain in place. In each case leverage is a bridge, and its size is governed by the need in front of it rather than by the maximum the collateral could support.

The real risks

Balance requires naming what can go wrong, because leverage amplifies outcomes in both directions. The first risk is the margin call and, uncured, the forced sale: if the collateral falls far enough to breach the agreed loan-to-value and the position is not restored, the lender can sell some of the shares. The note on margin-call risk sets out how that unfolds. The second is interest-rate risk: the cost of a Lombard loan is a floating reference rate plus a spread, so it rises if reference rates rise, and a facility that was comfortable can become less so. The third is the amplification of losses. A portfolio carrying a loan falls further in proportion to your own equity than an unborrowed one, because the loss lands on a smaller base of capital. These risks are manageable by structure, and the broader survey in the risks of Lombard lending covers them in full, but none of them disappears.

What makes leverage prudent

Between the legitimate cases and the real risks sits the discipline that separates prudent leverage from imprudent. Four habits do most of the work. Borrow at a conservative loan-to-value, with real headroom below the maximum, so the collateral can fall without breaching the threshold; the disclosed envelope runs from roughly 20% to 65%, and borrowing toward the lower part of what your collateral supports is a choice, not a constraint. Have a clear purpose, so the borrowing is sized by a defined need rather than by appetite. Borrow only what you can service and repay from resources other than selling the very collateral that secures the loan. And pledge diversified, liquid collateral rather than a single concentrated name, so that no one holding governs the outcome. The link between collateral quality and the advance it supports is traced in how much you can borrow against shares.

Where leverage turns unwise

The mirror image is instructive. Leverage becomes unwise when the loan-to-value is pushed to the maximum, leaving no room for the collateral to fall; when it is taken without a clear purpose, so the borrowing exists in search of a use; when it cannot be serviced or repaid except by selling the collateral, which removes the very optionality that made borrowing attractive; and when it is secured on a single volatile name that can move sharply on its own news. Each of these is a way of treating the loan-to-value as a target to be filled rather than a control to be respected — and that inversion, more than leverage itself, is what turns a tool into a hazard.

A tool, judged by its use

So is it wise to use leverage when investing? The honest answer is that leverage is a tool whose wisdom lies entirely in how it is used. In the right hands — a clear purpose, a conservative size, collateral that can absorb a shock, and borrowing that can be serviced and repaid — it lets an investor raise liquidity or fund a need without dismantling a portfolio built over years. In the wrong hands, the same instrument concentrates risk and removes the very flexibility it was meant to provide. The discipline is what makes the difference, and it is a discipline worth applying deliberately. This is general information rather than advice, and the right structure for any borrower is a matter for a proper conversation.