Borrowing money with the express purpose of investing is also known as leverage or gearing. It would be regarded as a high risk, high reward financial venture. If the markets go up you can make a big return on your investment, conversely if the markets go down losses are inevitably larger.
Your profit margins are also dependent on the interest rates you are charged on the loan. When you are borrowing to invest, you run the risk of taking a loss on your investment and still having to repay the principal and interest.
Why do people borrow to invest?
Investors borrow to invest in order to supercharge their investment return. It must be noted that even when experienced investors borrow to invest, they understand that it is a high-risk strategy. It is not something that is recommended without the guidance of a financial adviser. Borrowing to invest is a high-risk strategy for experienced investors. If you’re not sure if it’s right for you, speak to a financial adviser.
Investors understand that borrowing to invest is not a get rich quick strategy, it is at best a medium-term strategy, but in most cases, it must be considered a long-term investment. Typically, investors choose property investment loans or margin loans for shares. In most cases the investment acts as security for the loan
What are margin loans?
These loans are given for the express purpose of investing in ETFs (exchange traded funds), shares or managed funds. You will be required to meet an LVR (loan to value ratio) that is usually below 70%. The LVR is calculated as the total of your loan divided by the total of your investments.
If you are confused by this, you are not alone. If your loans get bigger or your investments fall in value, you will receive what is called a margin call. You will be given 24 hours to get your LVR back to the agreed upon level.
The LVR goes up if your investments fall in value or if your loan gets bigger. If your LVR goes above the agreed level, you’ll get a margin call.
Margin loans are an extremely high-risk strategy and should never be considered without first getting expert advice.
What are property investment loans?
This type of investment is far easier for people to understand and is generally not as risky. You are simply borrowing money to invest in property such as apartments, houses, commercial properties or land. You will be able to get a return on your investment in two ways, either through the collection of rent on the property or by the property value appreciating and you profiting from its sale. You will be responsible for paying maintenance costs, rates and property taxes.
How can a financial adviser help you offset some of the risk?
Getting expert advice can reduce the risk of big losses, if you blindly invest you increase the chance of your investment losing you and value having to repay the loan and the interest too.
A financial adviser can assess the capital risk attached to an investment. If there’s a downturn in the market, they can help you maximize profits or minimize losses through acting swiftly on your behalf. Having someone manage your investments for you helps you choose the correct investment strategy.
A financial adviser will closely monitor interest rates. If interest rates go down, then borrowing to invest is more attractive. When interest rates go up, they may advise you to cash out your investment as the profit margins are negligible.
Whatever your reason for borrowing to invest, always ensure you only invest what you can afford to lose and seek professional advice before making any large financial decisions.To talk to us about Gearing Strategies and your investment potential, contact 07 4779 0555 to arrange a Complimentary Initial Review with a Best Wealth Creation Adviser.