Are you ready to take the next step with gearing?
Are you ready to take the next step with gearing?
You don’t need to be a veteran trader, part time research analyst or high net worth investor to get started with gearing. If you have already begun your journey into investing and wealth building for the future, gearing may assist in achieving your goals faster while accepting the added risks.
Used appropriately and over a longer investment horizon, it has the potential to build wealth in a tax effective manner harnessing the power of compounding returns. Gearing is about behaviour, goal setting and sticking to a plan for both times of growth and volatility.
Australia is one of the most developed countries in the world where the population has an investment in listed shares or Exchange Traded Funds (ETF’s) outside of their super or retirement plan. According to the most recent investor study by the ASX in 2023, out of 20 million adult Australians at least 7.7 million held on exchange investments outside of their home or super with 22% of those making their first investment in the two years preceding.(1)
The chart below shows the demographic breakdown of the Australians that hold investments outside of their home and superannuation. It is clear that Wealth Accumulators (ages 25-49) are by far the largest cohort. (1)
Gearing, or borrowing to invest, presents as the next logical step up for those comfortable with investing and this can be done directly or via an adviser.
Benefits of borrowing to invest
You can use a gearing strategy for a variety of reasons, including increasing your exposure to the market and helping to grow your investment portfolio.
- Diversify your investment portfolio.
If you have an existing investment portfolio, this can be mortgaged to the lender, and you may be able to borrow against this portfolio for further investment. This may allow you to diversify your investment portfolio without needing to sell any existing holdings.
- Potential tax benefits.
Depending on your situation, interest incurred from borrowings used for an investment may be tax deductible. It could also potentially be prepaid, allowing you to bring forward the deduction to the current tax year, which may be beneficial for tax planning. This may particularly benefit the Wealth Accumulator segment who are in their peak earning years and may require an effective tax solution.*
- A financial strategy building a portfolio for the future.
Smart investors know they need to put in place strategies for income – either for retirement, a career change, or unforeseen events. Borrowing today may help you invest for your tomorrow and can be part of a financial strategy to support your goals.
- A flexible investment.
A margin loan can be used as a flexible loan facility because it does not require scheduled repayments, allows access to funds for investment purposes as required, and there is no maturity date. You also may have more control over your investment than for example an internally geared ETF or managed fund with control around investment choice, and gearing levels.
What are the risks?
Investing into equity markets and other investments is not without risk. By using a margin loan and gearing strategy, your losses can be magnified as you are exposed to a larger position in the market than you otherwise would be without gearing.
It is possible for certain events (such as margin calls) to occur at any time that may result in some (or all) of the loan being due for payment immediately, depending on the nature of the event. Other risks include interest rate changes and legislative risk.
Conclusion
For the investor that has already built a portfolio and is considering gearing as their next stage in their portfolio, they may be able to use these assets as security to take out a new margin loan.
Transferring in a portfolio to a Leveraged Margin Loan can be done as part of the application or completing a simple form at any time.
If you’re ready to start building wealth through gearing, we’re here to help. Call us today to speak with a customer service consultant to find out how to get started.
If you are financial adviser and want to learn more about recommending gearing to your clients, contact one of our Business Development Managers.
Footnotes:
1) https://www.asx.com.au/content/dam/asx/blog/asx-australian-investor-study-2023.pdf
Things you should know
*We recommend you obtain your own independent professional and tax advice on the risk and suitability of a margin loan and to determine whether your interest costs will in fact be fully deductible in your own circumstance.
Gearing involves risk. It can magnify your returns; however, it may also magnify your losses.
Issued by Leveraged Equities Limited (ABN 26 051 629 282 AFSL 360118) as Lender and as a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879). Information is general advice only and does not take into account your personal objectives, financial situation or needs. The views of the author may not represent the views of the broader Bendigo and Adelaide Bank Group of companies (“the Group”). This information must not be relied upon as a substitute for financial planning, legal, tax or other professional advice. You should consider whether or not the product is appropriate for you, seek professional financial advice and read the Product Disclosure Statement and Incorporated Statements (together, the ‘PDS’) and Product Guide, together with the terms and conditions applying to the product or service, available at www.leveraged.com.au, before making an investment decision. Not available to self-managed superannuation funds.
The information provided in this document may be subject to change. It is given in good faith and has been derived from sources believed to be accurate. Accordingly no representation or warranty, express or implied is made as to the fairness, accuracy, completeness or correction of the information and opinions contained in this article. To the maximum extent permitted by law, no entity in the Group, its agents or officers shall be liable for any loss or damage arising from the reliance upon, or use of the information contained in this article.
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