Borrowing to invest

Financial experts and consumers both agree that superannuation is only part of the solution to a comfortable retirement. By borrowing funds to invest in shares, property or other assets, you can reach a higher savings target and take advantage of many added tax benefits along the way.

The Australian sharemarket has been experiencing a record-breaking run and it would seem that anyone without a share portfolio is being left behind in the wake of financial wealth. But, as with any investment, there are risks involved and investors need to be aware of their tolerance for risk, how much they can afford to invest and what time frame they would like their investment to have.

Borrowed funds for the purpose of investment bring a series of tax benefits including deductible interest repayments and reduced capital gains tax, provided you hold the investment asset for at least 12 months.

Add to this negative gearing. When the costs of holding an investment exceed the income from rent or dividends, then it is described as negatively geared. You may be able to claim a tax deduction for the deficit.

The problem with focusing purely on the tax benefits is that investors can lose sight of the purpose of investing - that is, to grow wealth. Growth assets such as shares and property have a history of doubling in value every seven to 10 years so investors should be looking at a medium to long term time frame to really capitalise.

It’s always preferable to go with the cheapest loan rate and this is usually your home loan. Many home owners are able to redraw on their home loan, however home and investment accounts must be kept separate in order to claim tax deductions on the investment portion. Other options available are investment loans (you will need some form of home equity as security) and margin loans (lower interest rates but come with warnings attached). Your financial advisor will be able to recommend what is best for you.

Experts have long discussed the relative merits of shares versus property, and with the new superannuation laws now in place, super has become a vehicle of choice for accumulating super assets. It’s up to individuals and their financial advisors to determine what investment is the best one.

Arguments continue to rage over the best method of investing. The important thing is to start early and to invest wisely and well.

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