Borrowing to invest, the 3 different methods
3 Key takeaways:
- What investments can you borrow against
- How you can borrow
- Different ways to structure the borrowing
For many of us, we know that there are ways to borrow money from the banks. Such as taking a loan to buy property. But many do not realise that borrowing money is not limited to investment properties, however also accessible for shares as well. Meaning, that you can actually take out money from the banks and invest directly into stocks.
Generally, there are a few different ways to borrow money. The most common is a line of credit or margin loan. This is when the stock is used as the security to fund the borrowing. The other common method is via home equity. This is when security of the actual property is utilised to fund the borrowing which may be used to purchase shares or another property. Keep in mind that the original property is the security and could be at risk if repayments are not met on time.
From there it’s only a matter of how to structure the investment. Should it be negative, positive or neutrally geared:
Negative gearing occurs when the cost of owning an investment property exceeds the rental income it generates. This means that the investor is making a loss on the property and can deduct that loss from their taxable income, which reduces their overall tax liability. Positive gearing occurs when the rental income generated by an investment property exceeds the cost of owning it, resulting in a profit for the investor. In this case, the investor will have to pay tax on the profit they make. Neutral gearing occurs when the rental income generated by an investment property is equal to the cost of owning it. There is no profit or loss in this scenario, and the investor does not have to pay any tax on their rental income.
It’s important to note that negative gearing is generally seen as a high-risk investment strategy because it relies on the property’s value increasing over time to make a profit. Positive gearing, on the other hand, can be a more conservative investment strategy because it provides immediate returns.
For more information, please speak to one of our financial advisors who service the Yarraville, Seddon, Williamstown and Altona locations.
