Borrowing to invest

[mxh]

In the Sydney Morning Herald they do a 'Money' section, and there's a bloke who answers readers questions with financial advice. On several occasions I've seen questions along the line of "I earn $50k and am considering borrowing $100k to invest" - the advisor generally tell them what a good idea this is, and gives them some options.

 

I've never heard of this in the UK - maybe that's just me, but I'm sure this wasn't a recommended 'investment strategy'. It does seem a bit like borrowing twice your salary and just gambling with it. But are there any tax breaks in Aus, or other differences between the UK and Aus systems, that make this a more accepted strategy here in Aus?

[nikki244]

As far as I'm aware, Oz has a general 'anti tax avoidance' stance, and you have to pay tax on everything, including capital gains tax, foreign income tax, etc etc. So I don't think it's of any benefit tax wise to invest in Oz, and I personally think it's a really bad idea to borrow to invest. I would never want to invest something that I couldn't afford to lose if things didn't go to plan.

[mxh]

They seem to be happy to help investors buying multiple homes (ie with negative gearing) so I was just wondering if there were some other tax incentives for borrowing for investment eg loan repayments being offset against tax?

[Diane]

There are loads of tax advantages here to investment properties - but bear in mind you have to be paying the tax in the first place to get the benefit. Obviously you'd need to talk to a good tax or financial advisor for the full details, but as far as I know you can offset things like interest on a loan for an investment property against tax, as well as depreciation of all the fixtures and fittings on an investment property, and maintenance costs, etc etc. If you are considering taking this route though, check it all out really thoroughly first and you need a great accountant so you know you are claiming for everything you can (you can also claim some or all of the accountants charges against tax too I think!)

[mxh]

There are loads of tax advantages here to investment properties - but bear in mind you have to be paying the tax in the first place to get the benefit. Obviously you'd need to talk to a good tax or financial advisor for the full details, but as far as I know you can offset things like interest on a loan for an investment property against tax, as well as depreciation of all the fixtures and fittings on an investment property, and maintenance costs, etc etc. If you are considering taking this route though, check it all out really thoroughly first and you need a great accountant so you know you are claiming for everything you can (you can also claim some or all of the accountants charges against tax too I think!)

 

Perhaps I should have been clearer in my original post - I'm not talking about borrowing money to invest in houses, but borrowing money to invest in stocks and shares etc

 

I'm not looking to actually do anything - I was just raising for discussion what I thought to be an odd concept ie that it's accepted, even encouraged, that you should borrow money and then, in effect, gamble with it.

[flag of convenience]

No not a good idea and very poor advice. One should never invest in stocks or shares more than one can afford to loose. There are some very dodgy financial advisors about. Always remember if they were so good at following their own advice they probably wouldn't be needing your money. They'd have enough of their own.

 

Negative gearing is a big overall negative in Australia ,when it comes to the biggest single reason why houses are so inflated. What is better is to be debt free.

[Goochie]

You can borrow to invest quite easily here but you do need significant security and have to put up a fair chunk of cash yourself. The repayment terms are often a lot shorter than a mortgage would be for a similar amount.

 

Borrowing to invest is a good way of financing some things like a management buy-out where a company director wants to sell his share to someone with insufficient funds. The bank will look at the business history and decide if it will be able to repay the loan in time.

 

Its not like you can walk into your local NAB and walk out again having borrowed $100k for investment.

[mxh]

Its not like you can walk into your local NAB and walk out again having borrowed $100k for investment.

 

If you'd asked me that question in the UK I'd have agreed with you.

 

But that seems to be exactly what's being advised by this guy in the paper. I mean, if you were on a salary of $50k per year and had no savings, where else would you borrow $100k from?

[Andrew from Vista Financial]

Gearing is a very common wealth creation strategy and can be sound advice for the right people.

 

However the concept behind it should always be for the investment and not the tax benefits (these are a secondary).

 

The reason behind borrowing to invest is the belief that you will make more money back after tax than you pay on interest costs.

 

The cheapest way to borrow money is via equity in a property as the loan is secured, borrowing money currently is cheap as rates are at there lowest here in history, so if you are borrowing at 5% and making returns of 8% you are making money.

 

If the borrowings are used to invest then the interest costs can generally be deducted so essentially you only pay tax on the difference i.e 3% not 8%.

 

The other way to invest is via a margin loan however there are more risks involved with this strategy due to margin calls etc but again for the right person it can make great sense.

 

Using a margin loan for a regular gearing strategy is one way of reducing the risk and also means that there can be added benefit via cost dollar averaging.

 

There are of course risks involved and this strategy is not for the conservative or medium risk type of clients.

 

However for someone that has an appetite for risk and investing into growth assets i.e the share market, property (REITS/Infrastructure ect) and alternative assets (currency/commodities) and has the right investment timeframe it could be a great way of creating wealth and fit within their financial plan.

 

It can also be an easier way of investing or to start investing than investment property, this is because it can be done with a lot less money, the debt being taken on can be much lower, no worries about vacancy periods or troublesome tenants, much easier to sell/liquidise your asset etc and more effective for managing capital gains as diposal can be done over different financial years.

 

Anyone considering this would also require enough surplus income to cover the loan repayments which could be structured on and interest only basis or a principle and interest basis. The investment could be structured so that income is re-invested for future gains or directed to paying down the loan.

 

Where possible manage risk having income protection is an example. It is even possible if required to go one step further and to have a capital protection against your investment so that the capital invested is guaranteed to be returned after say 5 years to protect against market downturns.

 

So yes it is possible to apply for a loan for investment into shares and the markets, the loan would have to be assessed to ensure that the repayments can be met similar to applying for any loan.

 

It is very important for anyone considering this to understand all implications and it should fit within their risk appetite and financial circumstances.

 

It certainly is not for everyone and seeking financial advice is recommended!!

 

Regards

 

 

Andy

Edited August 17, 2013 by Andrew from Vista Financial