skip to Main Content

How Borrowing To Invest Can Help You in Newcastle and Beyond

Borrowing to invest also known as leverage is an aggressive way to create wealth.

What are the Benefits?

  • It allows you to have more money to invest, both your money and the borrowed money.
  • It allows you to invest in a specific asset that you couldn’t do without it. For example $100,000 deposit (savings), borrow $400,000. Purchase a $500,000 property. (Excluding stamp duty, legal’s etc).
  • Borrowing money to invest can provide taxation benefits such as depreciation and negative gearing (see below for more information).

You can get a higher return. For example:

NO BORROWED MONIES BORROWED MONIES
Invested Capital $100,000 $100,000
Investment Loan $0 $400,000
Total Investment $100,000 $500,000
Rate of Return (%) 10% 10%
Return ($) (Gross) $10,000 $50,000
Difference + $40,000
Value of Capital $110,000 $150,000

*This is an example only does not include any potential tax implications).

What are the Risks?

Borrowing to invest is not for everyone. The more you borrow, the greater the risk becomes as you have to repay the loan regardless of the performance of the investment.

  • Investment income risk – The income you receive from the investment may be lower than expected. For example, a company may not pay a dividend or a tenant may default. Do you have funds set aside to cover this?
  • Interest rate risk – Interest rates on the loan could rise. If they rose by 2% or 4%, could you still meet loan repayments?
  • Income risk – What if your income ceases due to sickness, injury or redundancy? Do you have a plan to manage this?
  • Capital risk – The value of your investment may fall and the proceeds from the sale may not cover the remaining loan balance. Do you have other funds set aside for this?

Using the same example as above:

NO BORROWED MONIES BORROWED MONIES
Invested Capital $100,000 $100,000
Investment Loan $0 $400,000
Total Investment $100,000 $500,000
Rate of Return (%) -10% -10%
Return ($) (Gross) -$10,000 -$50,000
Difference – $40,000
Value of Capital $90,000 $50,000

*This is an example only does not include any potential tax implications).

If you use your home as security you could lose your home in a worst case scenario.

For further information on borrowing to invest go to the Federal Government Money Smart website https://www.moneysmart.gov.au/investing/borrowing-to-invest.

Also refer to Investment Options/Choices for more information on investing.

Relevant Articles
Back To Top
Search