Gearing

What is gearing?

Borrowing to invest, also known as gearing can help you accumulate wealth faster by investing someone else’s money in addition to your own. This is because you benefit from the greater growth of a larger investment. 

Although there is a cost to investing borrowed money, if the investment produces a better return than the interest payable on the loan, then you benefit from the difference.

Although gearing has the potential to build wealth faster, it isn’t for everyone because of the risks. It is for this reason you must seek professional advice.

 When is gearing effective?

When the interest on the loan is greater than the income you receive from your investment, this is called negative gearing. This interest can be claimed as a tax deduction that may be used to reduce your tax the income plus on other income, such as your salary. In the event that your investment income is greater than the interest payment this is called positive gearing. Interest is still tax deductable but the income is also assessable.

Most people are attracted to gearing, and in particular negative gearing, because of this potential tax benefit. However, no investment strategy should be entered into purely for the potential tax benefits. No amount of tax benefits can make up for a poor investment. In considering gearing, you must look at the underlying investment and be aware that negative gearing only becomes effective if the investment grows sufficiently in value to make up for the after tax losses you are incurring every year. You should also be mindful that if you sell the investment capital gains tax would need to be paid.

There are many forms of gearing available from equity finance and margin loans to protected loans

What are the risks?

Whilst in a positive market returns are increased it is also true that in a declining market gearing increases the losses as well.

For more information and to determine if gearing and or what type of gearing is appropriate in your circumstances contact us at:  wealthcreations@blackmoreinvestments.com.au