Gearing is simply borrowing money to invest. The borrowed money can then be invested in several ways to help with your overall wealth creation strategy. With more money working for you, the potential return may be increased.
Gearing can also be a tax effective strategy, as the interest on borrowings for investments is usually tax deductible.
Two common strategies include:
Margin Lending is borrowing to invest in shares or managed funds using your existing cash, shares or managed funds as security. This increases the amount you have invested, which in turn increases your potential returns. Borrowing to invest with margin loans can be a simple, tax-effective way to build wealth.
This is when your borrowing costs (interest, fees, maintenance, repairs etc.) exceed the investment income produced. If you are on a higher tax bracket, this can provide valuable tax advantages.
Is gearing the right strategy for you?
Borrowing to invest is for experienced investors. It may be suitable if:
- You have adequate cash flow to service any borrowing commitments;
- You are in a higher tax bracket and the tax benefits are attractive; and
- You understand and accept the risk of an unpredictable market and future
Risks of Gearing:
The risks associated with Gearing can mean it is unsuitable for some investors. It’s important to consider these risks and it is highly recommended to seek Financial and Taxation Advice before undertaking a Gearing strategy.
There are a number of measures you can take to minimise the risks of Gearing:
- Do not over commit. Only borrow as much as you can comfortably afford to repay.
- Diversify your investments.
- Invest in quality growth Assets.
- Ensure your strategy is consistent with your risk profile.
- Invest for the long term to give your investments sufficient time to generate adequate capital growth.
- Insure your salary to prevent the need to sell your investments due to unexpected life events.
- Fix your loan interest rate to protect your cash flow should interest rates rise.