Borrowing to invest
Borrowing money to invest is also known as gearing. If you're thinking about borrowing money to invest in managed funds, shares, real estate or some other investment, this general information may help you decide if you should do it.
| If you borrow up to your eyeballs, especially if you're investing for the first time, you're risking financial ruin. |
Gearing
Negative gearing means your borrowing costs (interest and fees) exceed the income you receive on your investment.
Positive gearing means your borrowing costs are fully covered by the investment income.
There are two advantages of gearing:
1. You can increase the potential profits
If you borrow $100,000 to invest in shares, and they increase in value, then you get the benefit of that capital gain when you sell the shares. Equally, you get the benefit of any dividends and bonus share issues that may be made by the company while you own the shares.
2. You can get a tax benefit by negative gearing
Negative gearing is when your income from the investment (i.e. the dividends and bonus share issues) is less than the cost of the investment (i.e. interest that you are paying to your lending institution on the loan). The difference between the two amounts is usually a deduction on your taxable income. More information about negative gearing
Gearing into the stock market
Here are some rules to keep in mind when thinking about borrowing to invest in the stock market.
Rule 1: Don't ever fully gear into a stock market investment
Reputable advisers recommend you keep some money in reserve and avoid borrowing every last cent you possibly could. Interest rates could rise, share markets could fall, and your personal circumstances can change suddenly.
Some people borrow money to invest by using margin loans from a stockbroking firm or some other lender. More information about margin loans
Rule 2: Negative gearing is not for everyone
Gearing is a strategy best suited to you if you:
- have enough income from other sources, like a secure salary, or have a reserve of funds to meet possible margin calls if there is a significant drop in the market
- are in the highest income tax bracket, where the tax deductibility of the interest payments is maximised so the actual cost of the borrowed money is reduced as much as possible
- are an experienced investor, having a practical appreciation of the volatility of your investments and the risks involved.
You should not negatively gear into shares unless you are fully satisfied you can meet the interest payments and possible margin calls if the investment turns sour for a couple of years.
More information
More about credit, loans and borrowing
More about investing in shares
If you want to know more about choosing the right financial adviser, read our booklet 
Getting Advice
FIDO Website: Printed 09/03/2010
