Borrowing to invest, or gearing, can be a powerful means to build wealth. It allows you to increase your ability to build wealth by enabling a higher level of investment. Additionally, you can either positively gear or negatively gear.

The Benefits of Gearing

• Enables you to understand a higher level of investment. 
• In favourable market conditions, your earnings can be multiplied.
• Generally, if the cost of borrowing exceeds the income generated from the investment, this excess is an allowable deduction.
• If you borrow to invest in shares you may obtain imputation credits which can be used to reduce the amount of tax you pay.

The Risks of Gearing

• An asset may not provide the expected return.
• The market conditions under which you are borrowing may change. Therefore, If you over-borrow rising interest rates could restrict your ability to meet the loan payments.
• If you rely on the income from the investment/s, there may be periods where it produces little or no income, or even losses.
• Gearing can multiply your loss.
• If you take out a margin loan, and the market value of your investment falls enough to cause the balance of the loan to exceed the maximum lending value of your portfolio, you will be subject to a margin call.

For more information on gearing strategies, contact us to arrange a free initial interview with a WealthRite Adviser.