Borrowing to invest

Borrowing to partly or fully finance an asset is called gearing.

Gearing can be a very effective strategy for those who understand and allow for the risks. Gearing can be negative, positive or neutral depending on the return from the investment and the cost of borrowing funds.

Your QTCUFP Financial Planner will assemble and discuss the criteria you should consider before implementing a gearing strategy.

You should be:

• Considering gearing for wealth creation, not tax reduction
• In positive cash flow after allowing for your living expenses
• Sure of your future income
• Comfortable with a higher level of risk
• A long term investor
• Preferably on the highest marginal tax rate

It is important to remember that gearing can accelerate gains as well as losses so you should discuss all details with your financial planner.

Additional issues to consider are:

• Loan structure
• Income protection insurance
• Type of investing
• Taxation advice
• Exit strategy

Refinancing, or raising an equity loan

Having a mortgage helps develop a budgeting and payment discipline that is one of the first steps towards wealth creation. If you have already repaid, or are close to repaying your home loan, you may be in a position to use your home equity to build an investment portfolio.

Margin Loans

A margin loan allows you to borrow at competitive interest rates to finance an investment portfolio of shares or managed funds. Your portfolio acts as a security for the loan.
There are two types of margin loans: a standard margin loan or a margin loan with regular gearing. A margin loan with regular gearing combines the power of a margin loan with all of the benefits of a disciplined savings plan.

Your QTCUFP financial planner can help you create a gearing strategy tailored for your individual situation.