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.
Crosby Dalwood Pty Ltd ABN 30 132 317 876 provides its financial planning services as an Authorised Representative of Count. ‘Count’ and Count Wealth Accountants® are the trading names of Count Financial Limited, ABN 19 001 974 625. Australian Financial Services Licence Number 227232 (‘Count’) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Count is a Professional Partner of the Financial Planning Association of Australia Limited.
General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.