29 Mar What Are Your Options When Borrowing To Invest?
We’re all familiar with the horrible fall out that came with the GFC. So it’s no surprise that borrowing to invest has lost its popularity. Many Australian’s suffered terribly, losing homes and savings, which is certainly not something you can quickly get over.
That said, borrowing to invest is now looking like a better option than ever. It’s just not an option for the faint of heart and highly recommended that you speak to a professional prior to committing. But, if you’re interested, this could be one of the best decisions you’ve made in a while.
Thanks to today’s low interest rates and high share dividends, this has the potential to really make a difference to your financial situation. Right now you can potentially borrow money at less than 5 percent to buy a blue-chip share that’s likely paying 8 or 9 percent – it almost seems too good to be true!
When you’re borrowing you’ll soon experience an improved cash flow. Though this strategy does increase investment losses and gains, so it’s absolutely essential that you view it as a long-term investment. If you’re game for a long-term, potentially volatile investment, you have three main options: home equity, geared funds and margin loans.
If you’re not familiar with this phrase, you’re essentially borrowing money against your home. This will give you the lowest interest rates and the most secure loan. To give you fair warning, the people who lost their homes in the GFC typically borrowed against their loans. You’ll need to be cautious with this option and ensure you pay the interest!
To put it simply, geared share funds take your money and borrow against it. This means you’re able to own twice the shares you could normally buy. It’s an incredibly volatile option but could bring you massive gains if done correctly.
With margin loans you’ll pay higher interest rates than a mortgage and your shares are held as security. What does this mean for you? If your shares fall too low you will get a margin call, which means you have to provide extra money or your shares will get sold. While most lenders will allow you to borrow up to 70% it’s highly recommend that you avoid this. You should aim to keep your debt to 30% of the share’s value to keep you in the safest position.
If you’d like to benefit from one of these finance options, call Finance EZI on 1300 003 003 to talk about which would work best for you.
Not sure you’re ready to make this step, but still interested in learning more about long term investments? Check out our recent blog post on Self Managed Super Funds.