If you don’t have savings behind you, borrowing money to invest (known as ‘gearing’), is seen as a high-risk strategy. Making it work requires:
For most people this means seeking professional financial advice.
Asking these questions can help give you clarity on whether borrowing to invest is a good way forward. They’ll also be the type of questions a financial advisor will ask, so you will be well prepared when you get professional advice.
Borrowing to invest means capacity to increase your investment amount, and potentially increase your investment returns. It also gives you access to investment opportunities with a higher minimum buy in.
If you’re on a high marginal tax rate, your interest payments may be able to be claimed as tax deductions.
Borrowing to invest is inherently risky. Potential risks include:
Some risks are mitigated over a medium or long timeframe, so borrowing to invest is usually considered for longer-term investments. Risk is part of any investment and need to be factored into your investment strategy, so you’re not caught unprepared if things go wrong.
Tip: As part of your financial planning, think about best and worst case scenarios for your investment. If it doesn’t pan out, will it mean hardship for your family or put other assets at risk?
Any investment opportunity is likely to affect your taxable income. If your investment runs at a loss, you can use negative gearing to reduce your tax bill. On the other hand, if your investment makes a profit, positive gearing comes into play, which means you earn more money but pay more tax.
Understanding diversification and the role it plays in lowering risk can be useful in deciding how and where to invest your money. There are five classes of investment assets:
An ideal investment portfolio includes a mixture of higher and lower risk investments spread across the asset classes. Diversification helps spread your risk, so you’re less vulnerable to threat to a specific financial sector. For example, if you already own or are paying off a house, you may get financial advice to consider investing in bonds or shares rather than another piece of real estate.
Tip: If you’re not ready to buy where you’re living, you could become a ‘rentvestor’ and buy in an affordable area.
Whether you consider yourself financially progressive or conservative, investment is a smart strategy to build your wealth. But before you borrow to make an investment, get some quality financial advice from people you trust with your money. Talk to QBANK or call 13 77 28.
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Saving for a deposit is hard enough without being hit by unexpected costs.
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