Gearing and Margin Lending
Gearing is simply borrowing money to invest. The borrowed money can then be invested in separate ways to help with your overall wealth creation strategy. Gearing can also be a tax effective strategy, as the interest on borrowings for investments is usually tax deductible.
Two common Gearing 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 increased risk of this strategy.
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 both financial and taxation advice before undertaking a Gearing strategy.