Improve your investment portfolio with a Gearing or Margin Loan

Borrowing to invest is called ‘gearing’. Gearing provides an opportunity to invest a larger amount which can potentially benefit from future income and capital gains.

Benefits

  • Gearing gives you greater potential to build wealth because you will have more money to invest.
  • Having a larger investment portfolio can provide diversification, because you will have more money to invest over a broader range of assets.
  • Your taxable income may reduce because the interest is generally tax deductible.
  • Gearing can enable you to acquire assets that you may not otherwise have been able to afford.

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How gearing works

Gearing is when you borrow money to invest in income-producing assets, such as managed funds, shares or an investment property. You will generally be entitled to a tax deduction for the cost of the borrowing because it is producing taxable income for you. This tax advantage helps to reduce the cost of your borrowing.

  • A regular, independent income that you can rely on to deliver surplus cash flow to cover interest payments on your investment loan.
  • A willingness to increase your debt and hold an investment loan.
  • A long-term investment focus (generally longer than 5 years).
  • An investor risk profile with a high tolerance for investment risk and exposure to growth assets.
  • Income protection insurance, which can provide replacement income in the event that you’re sick or injured and unable to work.
  • Other insurance cover which can provide a lump sum to enable the debt to be repaid in the event of illness, disablement or death.
  • If you do not have secure income or employment, and cash flow problems arise, you may be forced to sell some, or all, of your investment portfolio quickly or at a time when the markets are down. This may result in a loss or capital gains tax, either of which could impact your ability to repay your debt.
  • A rise in interest rates will increase your cost of borrowing, and a decline in dividends or distributions will reduce your income. You need to have sufficient cash flow to absorb these or other potential adviser changes to your cash flows.
  • It is important not to rely solely on investment income to meet interest payments, as investment income may be irregular and an interest payment may fall due before investment income is received.
  • If your investment portfolio is negatively geared, your cash flow is reduced because the interest repayments and other expenses are more than investment income. This reduced cash flow can impact your ability to meet interest payments when due.
  • Most investment loans are secured, which means the loan is backed by an asset. If you default on your loan, the lender is able to sell any asset being held as security.
  • Although gearing provides the opportunity to increase potential gains when markets are rising, it also has potential to increase losses when markets are falling. This is because the loan has enabled a larger investment than would otherwise have been possible.
  • The value of your investment portfolio may fall in value, maybe to a point where sale proceeds are not sufficient to repay your debt. This means you could end up carrying significant debt even after your investment portfolio has been sold.

After analysing your current financial situation, including disposable income, risk profile, and investment time frames, your Elders Financial Adviser will determine if this investment strategy is right for you.

Learn if Gearing and Margin Lending is right for you.

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