Gearing is where you borrow money to invest. As already mentioned, it is best to clear all your debt before you make an investment. However, there will be situations where the investment is good and a small amount needs to be borrowed for the business to succeed. Lending can be for assets or stocks.
Gears allow you to increase your investment and potentially get a higher return. The downside, however, is if the investment doesn’t pay off, you’ll lose a lot more. A negative transfer occurs when the interest you pay on the loan is higher than the income from your investment (for example, from the property being rented). You can claim a loss or difference based on tax and write it off as a deduction from other income.
Negative transfer is not necessarily the best investment strategy. Even though you get tax relief, it still costs you. That is, you may save 25 cents on the dollar, but you have to spend one dollar for it.
People look at negative speed because they reckon that they will be able to sell the investment more than they bought it, and their losses are meanwhile deducted from other income they earn. They conclude that the Internal Revenue Commissioner is in fact helping them to finance the growth of the value of their assets.
If this can be avoided, do not borrow at home for investment. This is especially true when the investment is speculative. Things are going wrong and you wouldn’t want to find yourself on the street (without a family) without a roof over your head.
If you borrow money to invest, it is known as margin lending. The additional funds raised allow you to invest more, increasing the potential return on what you would get from your standard savings. It allows you to use someone else’s money so you can achieve a significant increase in your wealth from a small stake.
The downside is when stock prices fall below levels and when a margin call is made. When this happens, you will have 24 hours to respond in one of three ways. You have to get the money, you have to sell the property or you have to provide additional assets to replenish the capital.
If you have a loan with a margin, make sure you fully understand the terms of the loan and set survival strategies in case things fail.