Borrowing—or gearing, as it’s also known—can be a strategy that enables you to accelerate your wealth creation, and help you achieve your goals faster. When performed correctly, borrowing to invest is a tax-effective method to minimise the amount of tax you pay on your income.
But while borrowing to invest magnifies your gains, it also magnifies your losses. So it’s important that you get the right advice, with a robust financial plan.
That’s where we’ll help you. We’ll work with you to build your plan, arrange the finance, implement the correct holding structure, and recommend the investments best placed to achieve your goals.
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When it comes to your borrowing to invest strategy, we take a holistic approach, and include lending and tax advice to help you understand the full picture.
Get help making the right decisions by tapping into our trusted network of stockbrokers, advisers, and a panel of over 30 lenders to help you borrow.
We take the time to ensure you fully understand your investment decisions, and gain the knowledge to make the right choices for your future.
When it comes to borrowing to invest it’s never a one-size-fits all approach, and its risks and rewards are more suited to experienced investors. So we work with you to create a carefully tailored investment strategy that takes your risk for appetite into account.
We provide you with expert advice, support, and guidance that help you achieve your investment goals, and ensure you’re able to pay back your loans within the designated timeframe. We also walk the talk—our advisers only give your advice that they’d be willing to implement themselves.
Our approach to your borrowing to invest framework begins by taking a holistic approach to your broader investment strategy. We carefully review every detail of your financial situation, match this with your goals and vision, and then determine where each one of our services can fit in and be of use.
We focus on the bigger picture, using a unique methodology that helps you carefully and logically plan out your goals and objectives, and puts steps in place to achieve them. We call it Get Set, Get Moving, Get Free. Click through to discover how borrowing to invest forms part of your long-term investment success strategy.
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There are two ways you can borrow to invest in shares.
The first way is to take a loan from an existing asset, such as property. For example, say you have a home worth $1 million, with an existing loan of $500,000. It may be possible to draw down a further loan of $300,000 against your home. This $300,000 can then be invested into shares. The interest payable on the home loan may only be 3%, while the dividend return on the shares could be 4%. This then allows you to pay down the loan with the income from the shares, while at the same time enjoying the longer-term upside of your share prices increasing.
The second way to borrow to invest is through a margin loan, which is a loan that’s secured against the shares themselves. Let's say you wanted to purchase $300,000 in shares, but only had $150,000 in cash. To achieve a $300,000 portfolio, you could take out a margin loan for another $150,000. The interest on a margin loan tends to be higher than a property loan and is closer to 5% per year.
Borrowing to invest can be a good strategy if you’re looking to take on more risk and accelerate your wealth-generating ability. But with greater risk comes greater uncertainty, which is why it’s important to get good advice before you consider borrowing to invest.
A key part of your advice should include building a financial model to determine if borrowing to invest is actually necessary to achieve your financial goals. If you’re able to achieve your wealth objectives without borrowing, then the added risk may be unnecessary. However, if you’re likely to fall short of your wealth objectives in your current investment timeframe, then borrowing to invest can be a smart strategy.
But always be sure to get good advice on your overall financial position, your tax structure, the right investments, and the right loan.
Borrowing to invest in shares can either add to your taxable income or reduce it. It all depends on the type of shares you buy, the type of loan you take out, and where the shares are owned.
With interest rates staying low in recent years, it can be possible to generate more income from the shares you’re buying than the loan you use to purchase them. For example, a loan may be at a 3% interest rate, and the dividend income from shares may be around 4%. This creates an extra 1% of taxable income.
How much income your shares generate depends on the type of shares you buy. Some companies are more growth-oriented and pay less in dividends, which means you may be paying more interest than you receive in dividend income. This is called negative gearing. In this situation, the interest expense of the loan can offset other income you earn and can be a good way to reduce your tax bill.
It’s important too to consider the ownership of the shares before you begin thinking about what shares to buy. If you are likely to have the shares negatively geared, then it may make sense to have them held in the name of the highest income earner in your family. Alternatively, if the shares are going to earn more income than the interest you’re paying, it may make sense to have them in the name of the lowest income-earning member of the family.
You’ve also got the consideration of where the shares are owned, whether it’s a family trust, a company, or an SMSF.