A Financial Services Partners Adviser may recommend gearing as a part of your investment portfolio. They will review your situation to determine whether gearing is the right strategy for you.
What is gearing?
Gearing involves borrowing money to invest in income producing assets, such as shares or managed funds. This can provide you with opportunities to build your wealth.
Gearing involves a higher level of risk. Not only does it place your investments at risk but you may end up paying debt interest on assets that have fallen in value due to adverse market movements. Gearing may be tax effective, but it is only profitable if the investment returns exceed the after-tax cost of borrowing.
By taking out a loan, you will be required to pay interest until the loan is paid back. Depending on the type of loan, some security will generally be required.
Using a gearing strategy means you will acquire debt. You will need to consider the advantages and disadvantages before embarking on this kind of strategy as both returns and losses can be significant when compared to investing without gearing.
Negative gearing occurs when the return is less than the borrowing costs and is only beneficial if the excess tax deduction can be used to offset other taxable income. For example, where the dividends from a geared share portfolio are less than the interest payments on the loan used to purchase the share portfolio. Under present tax rules, you can claim the loss as a tax deduction against other taxable income and this can provide you with a benefit.
What kind of goals can gearing be used for?
Gearing may be suitable for people who:
- wish to accumulate wealth
- have a more aggressive risk profile
- have a long-term investment horizon of at least five to seven years
- are comfortable with the risks of borrowing to invest
- have a stable and reliable cash flow which is sufficient to meet loan repayments
- are on a higher marginal tax rate
- have insurance to cover loan commitments in the event of illness or death.
A Financial Services Partners Adviser may recommend a gearing strategy as a part of your investment portfolio. They will consider your needs, objectives and situation before they decide if gearing is right for you.
Talk to us about how gearing might work for you