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Gearing investments

Is now a good time to borrow to invest?

Nathan Lear
Partner/Private Client Adviser
17 Feb 2015

With interest rates in Australia extremely low, it’s worth considering whether now is a good time to consider a geared investment strategy, or put simply, borrowing to invest.

A geared investment strategy involves borrowing money and investing the capital into growth assets, such as property or shares. The aim is to increase the amount of capital invested. With positive returns, this would magnify your investment gains. However, it’s very important to note that losses can also be magnified.

Provided investment returns are positive, a geared investment strategy can have several benefits, including:

  • Increase the amount of money to invest, which can magnify long term growth.
  • Allows an individual to invest sooner than it would otherwise take them to save the equivalent capital.
  • May provide an opportunity to purchase an asset, or diversify into other assets that you may not otherwise have been able to, without the assistance of borrowed funds.
  • May provide a tax benefit if negative gearing is present.

So, is now a good time to borrow to invest? With interest rates being so low, it is an attractive proposition. In Australia, standard variable home loan rates are around 4.5% per annum, meaning borrowing is as affordable as it’s ever been. The investment return required to make the strategy effective is now much lower than it has been in the past. Provided the after tax return on borrowed funds outweighs the cost of the debt, the strategy has merit.

However, the strategy is not without its risks, including;

  • Investment risk: If the value of the investment falls, losses can be amplified. Investors must remember that when the value of the investment falls, they still owe the bank what they borrowed. The more you borrow, the greater the risk.
  • Cash flow: Where negative gearing exists, the annual borrowing cost is greater than the income return, it can result in a cash flow loss.
  • Servicing loan interest: You still have to service the loan interest, irrespective of the investment income generated. For example, if a tenant moves out of your investment property and there is no income for a period of time, or the listed company you own slashes their dividend, you still need to cover the full interest amount.    

Although the above risks need careful consideration, strategies exist to ensure they can be mitigated and the Advisers at Hewison Private Wealth are experts in this area of wealth creation.

Where the investor’s circumstances suit a geared strategy, it can be a very successful tool to create long term wealth.

The information provided above is general information only and individuals should seek specialised advice from a qualified financial adviser. Please contact Hewison Private Wealth for more information.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.