Gearing is the strategy of using borrowed money to purchase extra investments, it is also quite commonly known as leveraging. Gearing has the potential to magnify gains because the more money you have invested the more you make as markets rise. The opposite is also true because as investment values fall, losses are magnified; the borrowed amount still needs to be repaid even if the asset is worth less than you paid for it.
Other possible benefits include:-
- the interest you pay is a tax deduction
- if you invest in Australian shares, you may obtain imputation credits which can be used to reduce the amount of tax you pay
As with any investment strategy there are risks involved. The following are a couple of the risks associated with gearing:
- The market conditions under which you are borrowing may change. If you over-borrow, rising interest rates could restrict your ability to meet the loan payments
- Poor investment returns. The long term returns from the investment must be higher than the after tax interest costs for gearing to be of benefit
We strongly recommend you seek our financial advice before committing to a gearing strategy.
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