Strategic Borrowing in Today’s Interest Rate Environment
By Brian Famigletti, Managing Director & Head of Marketing
Falling Rates Change the Math
As interest rates move lower, strategic borrowing may be front-of-mind for many investors looking to adapt to the changing economic environment.
The US Federal Reserve has cut interest rates twice in as many meetings, and the majority of observers expect one more 2025 rate cut at the central bank’s December meeting, per CME Group’s FedWatch tool.
Overseas, central banks in Europe have also eased. The Swiss National Bank’s policy rate is now at zero, and the European Central Bank has lowered its deposit rate multiple times since mid-2024.
Against this backdrop, borrowing strategies could become more appealing for investors seeking liquidity, portfolio flexibility, or long-term positioning.
How Strategic Borrowing Can Support Financial Goals
Simply put, strategic borrowing means taking on new debt with a clear plan to use it to improve your long-term financial position.
With the federal funds rate at its lowest level in three years, and the potential for more cuts still on the table, borrowing is more affordable now than it has been in some time. This comparatively low-cost liquidity enables more flexible and advantageous strategies for high-net-worth investors who need to access funds quickly, but don’t want to sell their positions.
For example, imagine you commit $1 million to a private equity fund with an irregular capital call structure. You could set aside the lump sum in cash to cover all future capital calls. But that would mean sacrificing potential returns from putting those funds to work elsewhere. Instead, you might borrow against a diversified portfolio whenever calls are issued, ensuring you can meet your obligations without missing out on other opportunities.
Strategic borrowing to invest in publicly-traded assets (with much more predictable payment structures) can also make fiscal sense, so long as expected returns outpace borrowing costs. In a low-rate environment, this would theoretically hold true for a wider variety of investments.
The cherry on top is that strategic borrowing can facilitate all these strategies, without triggering a taxable event from selling appreciated assets, or incurring transaction fees. With borrowing costs low and markets near record highs, it may be cheaper to take on new debt and pay it back with interest than to pay capital gains tax on sharp profits and miss out on future returns.
Historical Precedent & Due Diligence
Past performance never guarantees future results. But historical analysis by UBS suggests that borrowing to invest in diversified portfolios has usually produced returns ahead of borrowing costs. For nearly 75% of the 24-month periods between 1998 and 2024, a balanced allocation of US stocks and government bonds outpaced US dollar borrowing costs.
Even with lower rates, strategic borrowing must be approached with care. Debt obligations persist regardless of market conditions, and there’s always the risk that unexpected volatility could push returns below borrowing costs.
Before integrating borrowing into your broader financial strategy, be sure to consider loan duration, potential refinancing needs, and interest payment stability. You should also plan for unexpected changes in income, spending, or portfolio performance.
If you’re exploring whether borrowing should be part of your financial plan heading into 2026, Griffin Asset Management can help. Schedule a consultation today.
Source:
UBS: Does borrowing make sense in 2025?
