Put simply, gearing means borrowing money to invest - usually in the form of an investment property, a business, shares or managed funds.
The main idea of gearing is to borrow money at a lower rate of interest than the return you will earn by investing that borrowed money – in order to make a profit.
The ability to add borrowed funds to your own, means that your total pool of funds available for investment is larger. It’s a strategy that can be beneficial if it allows you to build your wealth faster in a tax-effective manner.
However gearing is not without risk, as this strategy can magnify losses as well as gains. For instance, if there is a fall in the value of your investments – your loan amount still remains the same. Which means your loan amount could end up being greater than the value of your investments.
For this reason, gearing is regarded as a long term investment strategy. There are many other factors to consider before deciding whether a gearing strategy may be right for you.
To find out more about gearing, please contact us.