What is gearing?
Whatever your financial objectives, most of us wish we had more money to build wealth. Through gearing, you can access the funds you need to invest in shares and managed funds to help you reach your financial goals sooner.
Gearing is simply borrowing money for investment. By adding borrowed funds to your own funds, you may find it possible to reach your financial objectives faster or achieve higher goals than you could otherwise aspire to.
Gearing can increase the total amount invested so you own more investment assets. Therefore the returns, as a proportion of your original capital, are magnified.
Australians have generally geared into property via their home or an investment property, but increasingly more and more people recognise the benefits of gearing into the sharemarket as a way of generating wealth. This is because:
- gearing provides you with more funds to invest - potentially magnifying your returns
- gearing allows you to own a larger investment portfolio so you can start investing sooner rather than later
- gearing offers diversification across a spread of investments – reducing risk by not putting all your “eggs into one basket”
- gearing is flexible – allowing you to choose the degree of gearing that best suits your financial circumstances and objectives
- gearing can potentially be tax efficient - this is because the interest costs on money borrowed for investment purposes can generally be claimed as a tax deduction.
One form of gearing is margin lending. A margin loan is simply a line of credit to buy shares and units in managed funds, where your portfolio is the only security required for the loan. You can leverage an existing portfolio or create a new investment portfolio to help meet your wealth creation goals.
Why choose a margin loan?
- Extensive choice of investments
- Over 400 Australian shares
- US shares
- Over 2,000 managed funds
- Installments and other types of warrants
- Quick and easy to set up
- No financial assessment for loans under $3 million
- Loan approval within 48 hours
- No application or establishment fees (for individual borrowers)
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- Flexibility
- Borrow between 30-80% of the market value of over 2,400 shares and managed funds; available to individuals, companies and trusts
- Switch holdings within your portfolio at any time
- No fixed loan term so there is no set time to repay your loan
- Competitive interest rates and payment options
- Variable and fixed interest rates available, with arrears and advance payment options
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How does it work?
A Margin Loan is a simple and easy way to open up a wealth of opportunities.
A margin loan is a simple strategy to help build your wealth - take the example below. As an investor, you contribute $30,000 of your own funds as security. You then borrow $70,000. Combined, you have multiplied your available funds, allowing you to invest more and spread your investments across a wider range of assets.
Case study: Creating wealth
David chooses to invest $50,000 of his own capital and borrow $50,000 with a Margin Loan, investing the full amount in XYZ shares. Over 5 years, David’s investment grows from $5.25 (initial purchase price) to $15.01 (end value of XYZ shares). During this time, David receives dividends of $2.02 per share. The table on the following page shows how David’s margin loan helped him build greater wealth.
The above case study is a hypothetical example only. Due care and attention have been used in the preparation of forecast information
and hypothetical examples. However, actual results may vary and any variation may be materially positive or negative.
The Result
The gross borrowing costs have been covered by the dividends received. By using a Margin Loan, David was able to achieve an additional $98,950 in the value of his portfolio. This example refers only to capital growth and dividends.
The example is before capital gains tax, fees and any potential franking credits. The example assumes a marginal tax rate of 46.5% (including Medicare Levy).
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