Bor­row­ing to Invest

Kapiti News - - News -

There’s never been a cheaper time to bor­row money, with some banks hav­ing dropped their mort­gage in­ter­est rates be­low 4%. Rates this low make it very tempt­ing to bor­row more to buy a big­ger house, add an ex­ten­sion, take an over­seas trip, or trade in the car for a newer model.

While bor­row­ing to spend has a detri­men­tal ef­fect on your fi­nan­cial fu­ture, bor­row­ing to invest can be a good thing. If you can bor­row money at 4% and invest in some­thing that re­turns more than 4%, you will be fi­nan­cially bet­ter off. This is es­pe­cially true if the in­ter­est is tax de­ductible against the in­come gen­er­ated by the in­vest­ment, which it gen­er­ally is. Bor­row­ing to invest can be risky be­cause there are so many un­knowns. It’s not worth bor­row­ing to invest un­less the ex­pected in­vest­ment re­turns are high, and the higher the ex­pected re­turns, the more un­cer­tainty. Bor­row­ing mul­ti­plies gains, but it also mul­ti­plies losses so it pays to do your home­work. The most pop­u­lar in­vest­ment for bor­rowed funds has been prop­erty be­cause it pro­vides a steady in­come stream to cover in­ter­est costs and be­cause prop­erty prices trend up­wards over time with very lit­tle volatil­ity. Bor­row­ing to invest in a busi­ness is riskier as busi­nesses, even es­tab­lished ones, can fail. In­vest­ing in shares with bor­rowed funds is an­other op­tion, but the in­come from shares is gen­er­ally not as high as in­come from prop­erty and may not fully cover bor­row­ing costs. Share prices are volatile and be­ing forced to sell at the wrong time can be dis­as­trous. In­vest­ing in shares re­quires a long in­vest­ment time frame and you need to be sure you have enough cash to get by with­out hav­ing to sell. It is also im­por­tant to have a well­diver­si­fied port­fo­lio. Bor­row to invest in shares with great cau­tion.

Liz Koh is an Au­tho­rised Fi­nan­cial Ad­viser. The ad­vice given here is gen­eral and does not con­sti­tute spe­cific ad­vice to any per­son. A dis­clo­sure state­ment can be ob­tained free of charge by call­ing 0800 273 847. For free eBooks, go to www.mon­ey­max.co.nz and www.mon­ey­max­coach.com

“Please join me in be­com­ing a Nikau Kapiti

Fund Founder Donor”

- Liz Koh

The spe­cial ap­peal of this type of fund is that the cap­i­tal is in­vested and only the in­come is dis­trib­uted so funds can be given out every year, forever. In­come will go to Kapiti char­i­ties so donors will know that they are help­ing their lo­cal com­mu­nity in per­pe­tu­ity.

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