Borrowing to invest can be a potential strategy to accelerate your investment goals. However, it’s important to understand the risks involved before taking out a loan to invest. This comprehensive guide will teach you everything you need to know about borrowing to invest, including the pros and cons, how to find the best loan terms, and what to watch out for.
With the right information, borrowing to invest can be a smart move. But without proper planning, it can be a recipe for disaster. Use this guide to make sure you’re prepared before taking the plunge.
Risks of Borrowing to Invest
There are several risks associated with borrowing to invest. The most important thing to remember is that when you borrow money, you’re using other people’s money. This means that if your investment doesn’t perform as well as you’d hoped, you’ll still be liable for the loan.
In addition, borrowing to invest can increase your exposure to market risk. If the market takes a turn for the worse, you could end up owing more money than your investment is worth. This is known as “negative equity.”
Finally, borrowing to invest can also put your home at risk; if you borrow against the equity in your home, you could lose your home if you can’t repay the loan.
Pros of Investment Loans
Despite the risks, there are several potential benefits to borrowing to invest. The most obvious benefit is that it can help you accelerate your investment goals.
If you’re able to find a low-interest loan, borrowing to invest can also be a smart financial move. This is because you’ll be able to invest your money at a higher rate of return than the interest rate on your loan.
For example, let’s say you have $50,000 to invest, and you’re able to find a loan with an interest rate of 5%. If you invest the entire $50,000 and earn a return of 7%, you’ll have made a profit of $2,000.
If you had only invested $25,000 of your own money, you would have only made a profit of $1,000. In this scenario, borrowing to invest would have doubled your profits.
Where to “Borrow to Invest”
Now that you know how to borrow to invest, let’s look at some of the options you can invest in with your borrowed money.
There’s no denying that property has been one of the hottest investments in Australia for the last two decades. If you’re able to purchase an investment property, it can provide you with a steady income stream and the potential for capital gains.
Investing in shares is another option to grow your wealth over the long term. Through a diversified share portfolio, you gain exposure to a wide range of companies and industries, which can help to reduce the overall risk of your investment portfolio.
3. Managed Funds
Managed funds give you access to a wide range of assets, including shares, property, and fixed interest. They’re a great option for investors who don’t have the time or expertise to manage their investment portfolio.
4. Fixed Interest
Fixed-interest investments, such as term deposits and government bonds, can provide you with a steady income stream. They’re a great option for investors who are looking for a low-risk investment, however, you run the risk of not finding a product that will provide a rate of return higher than the interest rate payable.
Commodities, such as gold and silver, can provide you with the potential for capital gains. They’re can be a preferred option for investors who are looking for a more speculative investment.
Learn How You Can Successfully Build Wealth With CCFPG
If you’re thinking of borrowing to invest in Australia, there are a few things you need to know. First, you need to be aware of the risks involved – particularly the risk of losing your investment if the market goes down. Second, you need to make sure you have a good investment strategy in place, and that you’re comfortable with the amount of debt you’re taking on. Finally, you need to be aware of the financial implications of borrowing to invest – both the interest you’ll pay on your loan, and the capital gains tax you may be liable for if your investment is successful.
With all that in mind, if you’re still keen to borrow to invest, then go ahead and do your research – just make sure you know what you’re doing! As gearing can be complex, it’s wise to have an experienced financial adviser guiding you through the process with a thoroughly researched and considered investment plan.
Are you ready to get investment advice on the Central Coast? Central Coast Financial Planning Group has financial advisers who can guide you through complex matters like successfully building wealth through calculated and considered investment decisions. Call us or book online to secure your complimentary first meeting with our advice team today!
DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.