Overview of fi­nan­cial gear­ing

The Coffs Coast Advocate - - LIFE - SHANE GOUR­LEY

GEAR­ING is when bor­rowed money is used to buy growth in­vest­ments such as prop­erty or shares. Gear­ing can in­crease in­vest­ment re­turns but can also mag­nify in­vest­ment losses.

Gen­er­ally, gear­ing is most suited to clients who are still work­ing and earn­ing an in­come. There­fore, a gear­ing strat­egy is most com­monly used by peo­ple in wealth ac­cu­mu­la­tion to in­crease wealth over the longer term.

A gear­ing strat­egy can be set at three lev­els – neg­a­tive, neu­tral or pos­i­tive.

In as­sess­ing your suit­abil­ity to a gear­ing strat­egy, you should con­sider, among other things:

The ap­pro­pri­ate risk pro­file re­quired for gear­ing.

The cash flow needed to ser­vice the loans or make ad­di­tional pay­ments if and when re­quired.

If gear­ing is ap­pro­pri­ate, the next step is to re­view the gear­ing fa­cil­i­ties avail­able and de­ter­mine which op­tion is most ap­pro­pri­ate.

Con­sid­er­a­tion should be given to the choice of col­lat­eral, the type of re­pay­ments re­quired, the fre­quency of ad­di­tional in­vest­ments and the in­vest­ment choices al­lowed.

There are also dif­fer­ent in­ter­est rate op­tions avail­able on dif­fer­ent loans.

The choice of fixed and/or vari­able in­ter­est rates is im­por­tant.

The choice may de­pend on the type of gear­ing fa­cil­ity and the prod­uct provider.

There needs to be a di­rect link be­tween the in­ter­est and the in­vest­ment, be­cause for in­ter­est costs to be tax de­ductible the pur­pose of the un­der­ly­ing in­vest­ment must be to pro­duce as­sess­able in­come.

You should also con­sider and com­pare other forms of wealth ac­cu­mu­la­tion such as in­vest­ing into su­per­an­nu­a­tion.

One ad­van­tage of gear­ing out­side of su­per­an­nu­a­tion is its flex­i­bil­ity and ac­cess to money when needed.

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