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Interest rates are not the only consideration when deciding whether or not to borrow. Using credit strategically to build and maintain wealth can be a prudent way to achieve long-term goals. 

Whether you are interested in growing your wealth or protecting it, the strategic use of credit can help you achieve your goals. However, in light of the current interest rate environment and recent market volatility, hesitancy to borrow may arise. While the concern is valid, there is more to the equation when deciding if it's the right move. 


Other important considerations include liquidity and investment needs, as well as tax management. If you are planning to use credit to participate in market opportunities, then the anticipated return and holding period of the investment, as well as your capacity to repay the debt, can make the decision more nuanced. But before diving into personal factors, it’s worth exploring the economic challenges and how they could influence your decision. 




While interest rates are far below levels last seen in the 80s, they are still the highest they’ve been in some time, as the Federal Reserve (the Fed) continues its most aggressive rate hiking cycle in 40 years. While the Fed’s hawkish approach to monetary policy (e.g., aggressively raising interest rates to tame inflation) has helped rein in year-over-year inflation from a 40-year high of 9.1% last June to its current level of 4.9% in April,  the combination of these actions and other exogenous factors have resulted in skittish markets and a higher cost to borrow. The federal funds rate is currently set to a range of 5.00% to 5.25%, and although the Fed may hit pause on its rate hiking campaign for the remainder of the year, interest rates have reached a 16-year high, resulting in a relatively new landscape for borrowers. 


This can affect your ability to achieve positive arbitrage, which is when you borrow to purchase investments, such as real estate or alternative investments, and the rate at which you borrow is lower than the investment’s return over time. When it works, this can be considered a strategic use of leverage, which helps maximize wealth; however, the potential to successfully do so has become more difficult because of higher interest rates and dismal market performance.  


Then Why Borrow? 


The banking industry reported that total loan and lease balances posted a year-over-year increase of 8.7% in the fourth quarter of 2022, according to the FDIC. One of the biggest drivers was commercial and industrial loans, reflecting that businesses still had an appetite to borrow.  


Even in an environment of higher interest rates, you can still engage in strategic borrowing like the most successful corporations. In fact, there are longer-term, strategic uses for leverage, which are more dependent on personal catalysts than interest rates. This includes creating the means to participate in market opportunities as well as addressing short-term liquidity needs without selling investments, which would otherwise lead to negative tax repercussions. In these cases, it may be more important to evaluate your long-term outlook versus short-term gains, as well as your time horizon and the opportunity cost of borrowing. 


When a short-term expense is due, such as a tax bill, your first instinct may be to sell investments in order to create liquidity. Aside from taking money out of the market and missing out on long-term asset appreciation, this can lead to increased capital gains tax. However, a more prudent approach could be to borrow against your wealth and use the proceeds to pay the bill. Not only would you be able to meet the expense, but you can also access funds to invest in new ventures. This way you can keep your tax bills low, continue to benefit from the long-term appreciation of your invested assets, and increase your overall net worth with the additional investments that were made with the loan proceeds. 


Another example of strategic borrowing is to utilize a cash-out refinance mortgage to access the equity in your home. Reasons why you may want to do this include funding major expenses, purchasing another property, raising capital for your business, or even paying down floating rate debt. As short-term interest rates rise on investment credit lines, it may be worth replacing floating rates with longer-term, fixed rates (via a mortgage) while mitigating margin calls due to market volatility. 


Lastly, just because rates are higher doesn’t mean there is no longer the desire to purchase real estate. This means traditional uses for mortgages, like helping a family member purchase their first home, are still compelling reasons to explore borrowing. But everyone is unique and there is no one-size-fits-all solution. 


When to Reduce Debt


Some situations may call for the reduction of debt. If you have a high level of leverage and/or you are unable to generate sufficient, recurring cash flow to meet obligations, it may be better to liquidate assets instead of taking on additional debt. This can help improve financial stability and flexibility. By ensuring all assets are not leveraged, the ability to liquidate and reduce overall debt remains an option, whether it be prompted by excessive debt service obligations or a decline in asset values. 


However, the decision to increase or reduce leverage should be based on a careful analysis of your financial circumstances as well as the potential risks and benefits of each option. 




Borrowing, a key pillar of our Active Wealth approach, has grown in importance lately due to significant changes in market conditions. In light of the current interest rate environment, as well as heightened market volatility, it is important to consider your borrowing needs, current debt levels and time horizon. These will be the biggest determining factors in deciding if you should borrow. 


As always, you should work closely with your advisor to determine the highest and best use of any free cash flow, weighing the potential benefits of borrowing to invest against paying down on pre-existing debt. This could also mean doing both with any free dollars in blended investment and amortizing strategy. Regardless of which strategy you choose, borrowing can still make sense in the current rate environment. 


This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. The Bank of New York Mellon, DIFC Branch (the “Authorised Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 240 Greenwich Street, New York, NY, 10286, USA. In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, One Canada Square, London, E14 5AL. The London Branch is registered in England and Wales with FC No. 005522 and BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, One Canada Square, London E14 5AL, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd. This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.


The information in this paper is as of May 2023 and is based on sources believed to be reliable but content accuracy is not guaranteed. WM-386014-2023-05-22