What are the benefits of borrowing to invest?
You may ask why you would want to hold a negatively geared asset if it is making a loss. There are two main reasons:
You may be entitled to offset any loss you make on one investment, against other income, resulting in tax savings.
Over time, the capital growth of the assets means that you can sell the asset for a capital gain that more than covers the losses over the time held.
Other benefits of borrowing to invest can include:
If the investment is positively geared you have access to a passive income stream that can provide you with greater lifestyle choices
By borrowing to invest the capital growth potential of your assets is greater because of the greater capital base to begin with.
What are the risks of borrowing to invest?
While the benefits of gearing into an investment are attractive, there are risks which you need to consider:
Borrowing to invest can increase losses if the value of the investment drops significantly.
You could be subject to a margin call if you have borrowed through a margin loan (explained in more detail on the margin loan page).
By borrowing to invest in one asset such as an investment property, you may be reducing your exposure to a diversified investment portfolio.
You may have limited access to your funds, if your investment is large and illiquid such as property.
As long as you are aware of the risks you can be prepared to manage them or wear the consequences. If you are unsure then talk to others or get some advice.
You may ask why you would want to hold a negatively geared asset if it is making a loss. There are two main reasons:
You may be entitled to offset any loss you make on one investment, against other income, resulting in tax savings.
Over time, the capital growth of the assets means that you can sell the asset for a capital gain that more than covers the losses over the time held.
Other benefits of borrowing to invest can include:
If the investment is positively geared you have access to a passive income stream that can provide you with greater lifestyle choices
By borrowing to invest the capital growth potential of your assets is greater because of the greater capital base to begin with.
What are the risks of borrowing to invest?
While the benefits of gearing into an investment are attractive, there are risks which you need to consider:
Borrowing to invest can increase losses if the value of the investment drops significantly.
You could be subject to a margin call if you have borrowed through a margin loan (explained in more detail on the margin loan page).
By borrowing to invest in one asset such as an investment property, you may be reducing your exposure to a diversified investment portfolio.
You may have limited access to your funds, if your investment is large and illiquid such as property.
As long as you are aware of the risks you can be prepared to manage them or wear the consequences. If you are unsure then talk to others or get some advice.
No comments:
Post a Comment