{"id":8254,"date":"2023-12-11T12:01:12","date_gmt":"2023-12-11T01:31:12","guid":{"rendered":"https:\/\/adelaideprivatewealth.com.au\/borrowing-to-invest\/"},"modified":"2023-12-11T12:01:12","modified_gmt":"2023-12-11T01:31:12","slug":"borrowing-to-invest","status":"publish","type":"post","link":"https:\/\/adelaideprivatewealth.com.au\/borrowing-to-invest\/","title":{"rendered":"Borrowing to invest"},"content":{"rendered":"
Borrowing to invest, also known as gearing or leverage, is a risky business. While you get bigger returns when markets go up, it leads to larger losses when markets fall. You still have to repay the investment loan and interest, even if your investment falls in value.<\/p>\n
Borrowing to invest is a high-risk strategy for experienced investors. If you\u2019re not sure if it\u2019s right for you, speak to us.<\/p>\n
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Borrowing to invest is a medium to long term strategy (at least five to ten years). It\u2019s typically done through margin loans for shares or investment property loans. The investment is usually the security for the loan.<\/p>\n
Margin loans<\/strong><\/p>\n A margin loan lets you borrow money to invest in shares, exchange-traded-funds (ETFs) and managed funds.<\/p>\n Margin lenders require you to keep the loan to value ratio (LVR) below an agreed level, usually 70%.<\/p>\n Loan to value ratio = value of your loan \/ value of your investments<\/em><\/p>\n<\/div>\n The LVR goes up if your investments fall in value or if your loan gets bigger. If your LVR goes above the agreed level, you\u2019ll get a margin call. You\u2019ll generally have 24 hours to lower the LVR back to the agreed level.<\/p>\n To lower your LVR you can:<\/p>\n Deposit money to reduce your margin loan balance.<\/p>\n<\/li>\n Add more shares or managed funds to increase your portfolio value.<\/p>\n<\/li>\n Sell part of your portfolio and pay off part of your loan balance.<\/p>\n<\/li>\n<\/ul>\n If you can\u2019t lower your LVR, your margin lender will sell some of your investments to lower your LVR.<\/p>\n Margin loans are a high risk investment. You can lose a lot more than you invest if things go sour. If you don\u2019t fully understand how margin loans work and the risks involved, don\u2019t take one out.<\/p>\n Investment property loans<\/strong><\/p>\n Investment property loans can be used to invest in land, houses, apartments or commercial property. You earn income through rent, but you have to pay interest and the costs to own the property. These can include council rates, insurance and repairs.<\/p>\n Borrowing to invest gives you access to more money to invest. This can help increase your returns or allow you to buy bigger investments, such as property. There may also be tax benefits if you\u2019re on a high marginal tax rate, such as tax deductions on interest payments.<\/p>\n But, the more you borrow the more you can lose. The major risks of borrowing to invest are:<\/p>\n Bigger losses<\/strong>\u00a0\u2014 Borrowing to invest increases the amount you\u2019ll lose if your investments falls in value. You need to repay the loan and interest regardless of how your investment goes.<\/p>\n<\/li>\n Capital risk\u00a0<\/strong>\u2014 The value of your investment can go down. If you have to sell the investment quickly it may not cover the loan balance.<\/p>\n<\/li>\n Investment income risk<\/strong>\u00a0\u2014 The income from an investment may be lower than expected. For example, a renter may move out or a company may not pay a dividend. Make sure you can cover living costs and loan repayments if you don\u2019t get any investment income.<\/p>\n<\/li>\n Interest rate risk\u00a0<\/strong>\u2014 If you have a variable rate loan, the interest rate and interest payments can increase. If interest rates went up by 2% or 4%, could you still afford the repayments?<\/p>\n<\/li>\n<\/ul>\n Borrowing to invest only makes sense if the return (after tax) is greater than all the costs of the investment and the loan. If not, you\u2019re taking on a lot of risk for a low or negative return.<\/p>\n Some lenders let you borrow to invest and use your home as security.\u00a0Do not do this.<\/strong>\u00a0If the investment turns bad and you can\u2019t keep up with repayments you could lose your home.<\/em><\/p>\n<\/div>\n If you borrow to invest, follow our tips to get the right investment loan and protect yourself from large losses.<\/p>\n Shop around for the best investment loan<\/strong><\/p>\n Don\u2019t just look into the loan your lender or trading platform offers. By shopping around, you could save a lot in interest and fees or find a loan with better features.<\/p>\n Don\u2019t get the maximum loan amount<\/strong><\/p>\n Borrow less than the maximum amount the lender offers. The more you borrow, the bigger your interest repayments and potential losses.<\/p>\n Pay the interest<\/strong><\/p>\n Making interest repayments will prevent your loan and interest payments getting bigger each month.<\/p>\n Have cash set aside<\/strong><\/p>\n Have an emergency fund or cash you can quickly access. You don\u2019t want to have to sell your investments if you need cash quickly.<\/p>\n Diversify your investments<\/strong><\/p>\n Diversification\u00a0will help to protect you if a single company or investment falls in value.<\/p>\n Borrowing to invest is also known as \u2018gearing\u2019. Before you borrow to invest, check:<\/p>\n if you will be positively or negatively geared, and<\/p>\n<\/li>\n how this will impact your cash flow and tax<\/p>\n<\/li>\n<\/ul>\n Case Study<\/strong><\/em><\/p>\n Kyle gets a margin call.<\/p>\n Kyle has $10,000 invested in shares. He decides to borrow $15,000 to invest in more shares through a margin loan. The total value of his shares is now $25,000.<\/p>\n Kyle\u2019s LVR is 60% ($15,000 \/ $25,000). The maximum LVR his margin lender allows is 70%.<\/p>\n Kyle has invested in five mining companies. He\u2019s taking on a lot of risk as he\u2019s not diversified. After a fall in the price of commodities, Kyle\u2019s shares fell by $5,000. The total value of his investments is now $20,000. The value of his investment loan is still $15,000.<\/p>\n Kyle received a margin call from his lender as his LVR had increased to 75% ($15,000 \/ $20,000). He had 24 hours to lower his LVR.<\/p>\n Kyle used $2,000 of his savings to reduce his loan balance to $13,000. This lowered his LVR to 65% ($13,000 \/ $20,000).<\/p>\n Kyle has money in a savings account ready in case he gets another margin call.<\/p>\n Please contact us to find out more about this topic.<\/p>\n Source: Important note: This provides general information and hasn\u2019t taken your circumstances into account.\u00a0 It\u2019s important to consider your particular circumstances before deciding what\u2019s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete.\u00a0You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.\u00a0 Past performance is not a reliable guide to future returns.<\/span><\/p>\n Important<\/span> The post Borrowing to invest<\/a> appeared first on MLC Contemporary<\/a>.<\/p>\n<\/div>\n\n
Borrowing to invest is high risk<\/h3>\n
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Managing the risk of an investment loan<\/h3>\n
Gearing and tax<\/h3>\n
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Reproduced with the permission of ASIC\u2019s MoneySmart Team. This article was originally published at\u00a0https:\/\/moneysmart.gov.au\/how-to-invest\/borrowing-to-invest<\/span><\/span><\/span><\/p>\n
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