Gearing – a brief explanation
Posted by: TJL Accountants & Advisors | On: September 26, 2018
The term gearing, when used in relation to investments, refers to someone borrowing money to invest.
It is a strategy that amplifies the risks and return of any investment so it is definitely not for everyone. However, for investors with a longer time frame for investing (we suggest at least 10 years), borrowings can be used to gain access to investments which they would not otherwise have, and this can help accelerate wealth accumulation plans.
A common example of gearing that many people would be familiar with is borrowing to purchase an investment property and then renting that property to a tenant. The interest (and other related property expenses) the owner pays on the investment loan is tax deductible. If the tax deductions available exceed the rental income the property earns, that property is negatively geared and has the effect of reducing the owner’s taxable income and tax payable. If rent exceeds the expenses, the property is positively geared.
Generally speaking, gearing should only be considered for investing into high growth assets like shares and property with good prospects for a capital gain or growth in the value of the investment. It doesn’t make sense to borrow to invest into a Term Deposit for example, as the likely interest cost will exceed the returns and there is no prospect for a Term Deposit to grow.
If you would like to discuss your personal investment goals or any other aspect of your financial position, please contact the TJL Financial Management team on (02) 6554 9511.