Borrowing to invest

invest-splashIn broad terms, gearing is simply borrowing money for investment…

The investment could be in property (residential or otherwise), a selection of shares or even a balanced investment portfolio.

Gearing can multiply the return you would have received from your personal funds alone. It can however, be a two-edged sword. If the investment performs badly, your losses are multiplied instead.

Negative gearing is an extension of gearing where the cost of borrowing exceeds the income from the investment made with the borrowed funds. Additional cash is required to make up the difference, and this will usually be accepted as a tax deduction against other income, such as salary. To make money, you must make a sufficient total return from investment income and net capital gains (after tax) to offset the net cost of borrowing (including tax benefits).