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Gearing – borrowing to invest

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					FACT SHEET


          Gearing – borrowing
               to invest
     Gearing, or borrowing to invest, is a strategy used to increase your wealth by leveraging
     your savings or equity.

     What is gearing?                                                     Types of gearing
     Being able to invest more can mean greater investment returns        You can be positively or negatively geared:
     and exposure to a greater range of investments than would            > Positive gearing is when you borrow to invest in an income
     otherwise be the case. Your financial adviser can point you in         producing asset and the returns from that asset exceed the cost
     the right direction with the information, finance and brokerage        of borrowing. An example would be if you borrowed to invest in
     services you will need, whether you are looking to gear property,      shares and the dividend distributors exceeded the expenses of
     shares or managed funds.                                               the loan.
     Why borrow to invest?                                                > Negative gearing, put simply, is when you borrow to invest in an
                                                                            income-producing asset and the cost of borrowing exceeds the
     Borrowing to invest makes sense when you believe the
                                                                            income returns from that asset. For example, negative gearing
     investment returns you achieve will exceed the cost of the
                                                                            on a property occurs when the annual interest payable on the
     borrowing. Gearing is a strategy best suited to investors who
                                                                            loan used to acquire the property, plus allowable deductions,
     can cope with higher risks and have income from other sources
                                                                            exceeds the annual rental income the property generates.
     to service the loan.

     What are the pros and cons of gearing?                               What gearing strategies are available?
                                                                          > Home equity loan
     Gearing is not suitable for everyone. Here are some key points to
     consider when deciding if gearing is the right option for you:         You may be able to draw down on the equity in your home as
     > Potential to increase gains and magnify losses – your returns        security for a loan to leverage into other investments. This may
       may be increased by investing a larger sum of money through          be appropriate for people who have a large amount of equity in
       borrowing and while you will experience increased gains in a         their home with minimal diversification.
       rising market, you may also experience magnified losses when       > Personal loan
       markets fall.
                                                                            You can borrow funds to invest, although this strategy may
     > Tax benefits – you may be able to deduct interest expenses           attract a higher interest rate. This type of loan is usually
       and ongoing borrowing fees for tax purposes depending on             established on an unsecured basis and the loan amounts are
       your individual circumstances. If you invest in funds that           therefore limited.
       include Australian shares, the income generated by the
       investment may also have tax credits which may be used to          > Margin loan
       reduce your tax liability.                                           A common gearing strategy is using a margin loan. The term
     > Accessibility to funds – some investments, such as                   ‘margin loan’ refers to the way in which lenders protect
       direct property, have large upfront costs and may not                themselves from market volatility and its impact on the security
       allow you to release part of your investment immediately.            you have provided. Lenders permit you to have a maximum
       The investment option you choose will in part depend on your         lending ratio. For example, a managed fund might have a
       need to access the funds.                                            lending ratio of 60%. This means, if you had capital of $40,000,
                                                                            you could borrow another $60,000. Of the total $100,000, 60%
     > Diversification – you may be able to reduce your risk by             would consist of borrowings.
       spreading your investment across more asset classes.
                                                                          Lenders then allow a margin of safety, say another 5%, which
                                                                          means the value of the portfolio could fall without any action
     Who does gearing suit?                                               being taken, as long as the borrowings do not exceed 65%.
     Gearing will generally suit long-term more aggressive style          The reverse side of this is when the value of the portfolio drops
     investors with surplus cash allowing them to meet their              below 65%, you will be faced with a margin call (see over for
     ongoing liabilities, including interest payable on the loan. It is   explanation) which requires you to rebalance your portfolio by
     also important to consider insurance options, such as income         selling part of the investment or adding funds to bring the ratio
     protection or death and disablement insurance, to enable you to      back to an acceptable level.
     meet your obligations in case of job loss, illness or death.
     This type of strategy may also suit you if you have equity in your
     home you wish to unlock and diversify into other asset classes.
     What is a margin call?                                                              How does it work?
     A margin call requires you to restore the gap between the security                  Meet Brian and Sue
     value of your investment and the balance of your loan. This can                     Brian and Sue have $100,000 to invest and after meeting
     be done by topping up your account with cash or additional                          their financial planner have decided to invest in a number of
     investment securities, or by selling some of your managed                           managed funds. They can use their savings of $100,000 only, or
     investment units or shares. There is usually a strict time limit of                 they can use a gearing strategy to borrow another $100,000 and
     24 hours in which this must be done.                                                invest a total of $200,000.
     If you fail to meet a margin call, the lender has the right to sell                 If Brian and Sue decide to only invest their $100,000 without
     enough of your investments to restore your margin. They are                         gearing, after 20 years, their net cash position after tax is
     not usually obligated to consult you before taking action, and                      $396,685. If they decide to invest their $100,000 and borrow an
     you will have no control over which stock will be sold to cover the                 additional $100,000 (with 50% gearing), the net cash position
     margin call.                                                                        after tax is $481,485, taking into account the repayment of
     Therefore, if you are considering a margin loan, you need to                        interest and the $100,000 principal sum borrowed. By utilising
     ensure you have the necessary reserves available to meet margin                     this strategy they have an additional $84,800.
     calls. It is also critical you review the margin lending agreement                  Assumptions:
     prior to investing. This document will outline the terms and                        >Capital gains of 5% p.a.
     conditions of the loan, how interest will be calculated and what                    >Income of 3% p.a.
                                                                                         >Imputation credits of 50%.
     your obligations are.
                                                                                         >Interest rate of 7.5% p.a. (interest only).
     Your financial planner may recommend strategies to help limit the                   >Net-of-tax investment income is being reinvested.
     possibility of a margin call.                                                       >Investment growth subject to capital gains tax (CGT) on redemption of investment.
                                                                                         >CGT discount of 50% applied.
     Are there any tax benefits?                                                         >Example customer is on the 31.5% tax bracket (including Medicare levy).
                                                                                         >Results shown are net of all taxes.
     Borrowing to invest through a margin loan can offer various tax                     >Part performance in service of future performance.
     advantages. The interest on margin loans can often be claimed as                    The savings amount is an illustration only and is not a prediction or estimate of the
     a tax deduction. Also, if you decide to invest the money you have                   actual savings you can achieve.
     borrowed in Australian shares (either directly or via a managed                     Would you like more information?
     investment), any income in the form of dividends you receive may
     provide franking credits which can be used to offset income tax.                    Contact your ANZ Financial Planner who can provide you with
                                                                                         information so you can make the decision that is right for you.
     What about interest rate rises?
     Interest rate rises may also impact margin lending borrowers.
     The interest you pay on a margin loan can often be claimed
     as a tax deduction. So while a rate rise will trigger an increase in
     the interest on your margin loan, the after-tax impact could be
     less, depending on your marginal income tax rate.




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