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Gearing - Borrowing to Invest
The investment could be in direct shares or managed investments, such as an equity trust, balanced fund or property. Gearing is, in essence, directed towards producing a larger investment return by using borrowed funds, often in addition to your own funds, so that financial goals can be achieved more quickly. Gearing can be used as part of the overall investment strategy to help build your wealth. It gives you greater potential to generate wealth because you have more
money in the investment market.
It is best to gear against growth-based investments, such as shares and property, and gearing should always be viewed as a longterm strategy. You need to be able to retain the investment and maintain loan repayments for at least five to ten years to obtain the benefits of long-term growth.
The fundamental rule is that gearing an investment only makes sense if:
the income received from the investment (after taxes and all expenses) is expected to increase in the future to cover the (after tax) cost of interest and give a reasonable return on the equity invested, or
the market value of the investment asset (after taxes and expenses) is expected to increase at a rate that exceeds the negative cash flow (after tax).
This document contains general advice only. You need to consider with your financial planner, your investment objectives, financial situation and your particular needs prior to making any strategy or products decision.
This information is correct as of April 2016
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