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With interest rates so low, it’s worth considering the idea of borrowing to invest. What are the pros and cons?
By Julie Nipperess
With interest rates currently so low, now is a good time to consider borrowing to invest.
What is borrowing to invest, I hear you ask? It simply means using borrowed funds and investing them in such a manner that the returns are expected to be greater than the cost of making that particular investment.
For example, if you used equity in your home, and secured a loan with an interest rate of 4% and invested it into shares or managed funds that achieved a return of 8% – the return on your investment is double the cost of holding that investment.
It is not dissimilar to purchasing a house, which you need a mortgage for, except that you’re asking the lender for funds to invest in shares or managed funds.
But it’s not for everyone. Firstly, you need to be comfortable taking on some debt, and some investment risk.
And secondly, as with any investment (particularly if you have gone into debt to procure the investment), you need to understand that there are no guaranteed returns.
But if you’re interested in the concept of borrowing to invest, here’s what you need to know.
Firstly, find out what you can borrow, as well as the terms of the loan. Borrowing to invest is not a new concept and most lenders have competitive loan products for exactly this.
My only word of caution is that you make sure you do your homework on margin loans – they can be risky, and they’re not the best idea for a newbie investor. But margin loans are certainly not the only option.
Talk to your lender about tapping into the equity in your property, or taking out a short-term personal loan. Shop around, but before you sign anything, talk to a professional financial planner too, about how best to invest the funds, and what you’re hoping to achieve.
If you’re new to the idea, then only borrow a little to begin with, until you feel comfortable with the concept. You can get into a managed fund for as little as two or three thousand dollars.
Managing a share portfolio can be a full-time job and many novices find it quite fun and interesting, but it is wise to choose a professional financial adviser if you’ve never done this before, and particularly if you’re investing borrowed funds that have to be paid back, with interest. If this is the case, you really want to manage your portfolio for strong returns. Because failing could affect your credit record and borrowing capacity for a long period into the future. A financial planner can help you determine if this type of investment is suitable for you, the likely impact, and work in your best interests.
Right now is a good time to borrow money while interest rates are low and are likely to stay this way for some time.
And while debt can be a worrisome concept, it can also, when used wisely, be the tool that gets you ahead of the money game.
If you borrow conservatively, and get the right financial advice, then borrowing to invest can be a positive financial strategy.
But before you make any decisions you need to take into consideration the fees and other associated costs with borrowing and investing, as well as the tax implications and the general risks. It’s only when you’ve weighed up all the information that you can decide whether or not borrowing to invest is the right move for you.
The information contained in this article has been prepared without taking into account your individual objectives, financial situation or particular needs – it is GENERAL ADVICE ONLY.
Before acting on any information in this article, I recommend that you consider whether it is appropriate for your individual circumstances.