Borrowing to Invest: Things to Consider
By Nick M Flynn
Borrowing to buy mutual funds or other forms of investment can be an effective way to improve your financial returns. However, it involves more risk than paying for an investment completely with cash.
"Leveraging" is the other term for investing with borrowed money. It can also be called as "gearing". As long as you are investing at a higher rate compared to your borrowing cost, you can earn profit.
What is Home Gearing?
Home Gearing is the most common way of leveraging where you use your home's equity as a security for an investment loan. Your property's equity is basically the difference between its value and what you owe it. Home gearing is an excellent way to put that equity to perform. If applied with an effective investing strategy, home gearing can produce high amount of profits. However, the worst thing that may happen is putting your equity or possibly your home at risk.
What are the Benefits and Risks of Leveraging?
* Benefits of Leveraging
· Accelerate your wealth creation - build our wealth faster by investing a larger amount of cash than you could have otherwise invested using your own money
· Potentially reduce income tax payment - interest and other cost of leveraging may be tax deductable and could potentially reduce your tax income.
· Utilise existing equity - borrowing against your current portfolio can unlock equity. Moreover, you are able to hold a larger more diversified investment portfolio
· Bring forward tax deductions - bringing forward a tax deduction by prepaying interest is possible (for up to 1 year).
* The Risks of Leveraging
· Leveraging can magnify gains but at the same time it can also magnify losses. If investment returns are less than your gearing costs, you may be unable to service your loan.
· Loan cost and interest rate risks. The changes to interest rates and fees change the cost of your loan. Furthermore, deciding to terminate your loan can also have additional charges.
· There is a capital risk because the assets you may invest in may not perform as expected.
· There is also an income risk. Like any loan, you have to be sure that you can afford the service of it.
Sometimes, it is not good to rely on your investment because this source may not always sufficient.
Whatever, kind of investment you're putting up, you always make sure that your cash flow is sufficient to meet both your living expenses and loan repayments.
· It has legislative risk. The changes in tax legislation as well as the regulatory framework may reduce the tax advantages of leveraging.
Borrowing to invest can be an effective strategy, but it's not for everyone. Before you invest, ask for an expert financial advice from a reliable and skilled agency whether this type of debt is good for you or not.
What is Home Gearing?
Home Gearing is the most common way of leveraging where you use your home's equity as a security for an investment loan. Your property's equity is basically the difference between its value and what you owe it. Home gearing is an excellent way to put that equity to perform. If applied with an effective investing strategy, home gearing can produce high amount of profits. However, the worst thing that may happen is putting your equity or possibly your home at risk.
What are the Benefits and Risks of Leveraging?
* Benefits of Leveraging
· Accelerate your wealth creation - build our wealth faster by investing a larger amount of cash than you could have otherwise invested using your own money
· Potentially reduce income tax payment - interest and other cost of leveraging may be tax deductable and could potentially reduce your tax income.
· Utilise existing equity - borrowing against your current portfolio can unlock equity. Moreover, you are able to hold a larger more diversified investment portfolio
· Bring forward tax deductions - bringing forward a tax deduction by prepaying interest is possible (for up to 1 year).
* The Risks of Leveraging
· Leveraging can magnify gains but at the same time it can also magnify losses. If investment returns are less than your gearing costs, you may be unable to service your loan.
· Loan cost and interest rate risks. The changes to interest rates and fees change the cost of your loan. Furthermore, deciding to terminate your loan can also have additional charges.
· There is a capital risk because the assets you may invest in may not perform as expected.
· There is also an income risk. Like any loan, you have to be sure that you can afford the service of it.
Sometimes, it is not good to rely on your investment because this source may not always sufficient.
Whatever, kind of investment you're putting up, you always make sure that your cash flow is sufficient to meet both your living expenses and loan repayments.
· It has legislative risk. The changes in tax legislation as well as the regulatory framework may reduce the tax advantages of leveraging.
Borrowing to invest can be an effective strategy, but it's not for everyone. Before you invest, ask for an expert financial advice from a reliable and skilled agency whether this type of debt is good for you or not.
Do you want to learn more about financial planning particularly on borrowing to invest? You may visit Baggetta Accounting for expert financial advice and tips.
Article Source: http://EzineArticles.com/?expert=Nick_M_Flynn
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