Record low interest rates mean that more people are borrowing to invest in property. With interest rates low and the property market stabilising, now is the perfect time to borrow against your house or take out an investment loan. Borrowing to invest is known as gearing. While gearing can be fruitful there are a few potential traps to look out for.
Should you borrow to invest?
Making wise investment decisions is incredibly important to the long-term success or failure of your portfolio. It doesn't matter how low interest rates fall if your investments aren’t making a profit or your aim is purely to reduce your tax bill you need to reconsider your investment strategy.
While using the bank's money to grow your own wealth can be profitable it also means that any losses can also be magnified. Borrowing to invest is only suitable for people whose circumstances mean they can cope comfortably with potential risk.
Here are a few golden rules to stick to when borrowing to invest:
- Take a long-term strategy - only purchase an asset that you are prepared to hold for at least five years but preferably 10.
- Run through what would happen in the "worst-case" or "what-if" scenario before deciding to borrow to invest. For property while interest rates are a consideration so too is a lack of tenancy for an extended period. Major damage to the property e.g. due to floods can also cause extended periods without rent.
- If you borrow money to invest and your investment strategy relies on putting in extra money each month, consider what will happen if you get sick and can't work or lose your job.
- Don’t borrow more then you can afford now and in the future.
- Utilise the services of a Property Manager to protect your investment.
Be wary of....
- People on high incomes can get more tax benefit from negative gearing then positive gearing, however you need to consider what will happen if your income drops. Negative gearing is when the income from an investment is less than the interest on the loan and other costs. Investors can claim a tax deduction for the difference.
What should I do next?
If you wish to discuss borrowing to invest then give a Financial Planner or a Mortgage Broker a call today. This will ensure that you are making the right decision that best suits you and your circumstances. This this can be a decision that can make your portfolio grow or shrink very quickly. If you are looking to expand your portfolio why not give us a call or visit our website.
*Disclaimer: The information in this article is of a general nature only and should not be relied upon as advice. You should seek professional advice for your particular circumstances before entering into any transaction.