Borrowing to fund your investments is called ‘gearing’. However we are often told that debt is bad, so most of us try to clear it as quickly as we can. We are also told to avoid taking on new debt where possible. While this is certainly true in some cases, debt can also be a powerful tool for creating wealth. When done sensibly, there are many times where borrowing may be appropriate, including purchasing a house and borrowing for investment.
Traditionally, gearing has been more commonly associated with property investment, however over the years gearing to invest in shares has become more widespread. Many people now use gearing as part of their overall investment strategy to help build their wealth.
Should you be gearing?
Depending on your circumstances, gearing can provide a number of benefits:
Accelerate your investment returns
• Borrowing allows you to invest more money than using only your own funds. It gives you greater potential to build your wealth because you have more money in the investment market.
Keep all of the profits
• After you cover the borrowing costs and tax, 100 per cent of the growth and the income you earn on the invested money are yours to keep.
• When you borrow to invest in income-producing investments, the interest on your loan is treated as an expense for tax purposes. This means that you can claim the interest as a tax deduction.
• The higher your marginal tax rate, the greater the benefits of any tax deductions you receive.
Who should gear?
Gearing is not a suitable strategy for everyone. It is best suited to people who are comfortable taking extra risk with their investments and those who can cope with potentially large fluctuations, both up and down, in the value of their investments.
Gearing is best suited to people who:
• Have a high level of comfort when it comes to investing.
• Have high disposable income.
• Are prepared to hold their investments for at least seven to nine years.
• Can afford the interest repayments without relying on the investment.
• Have funds, other than the borrowed money, that can be accessed at short notice should the need arise.
If you believe the gearing could be for you, contact Joseph and let us guide you through the many strategies you could implement.