Borrowing to invest

In certain circumstances it may be appropriate to borrow money to invest.

In some cases the expected income from such investments will cover the interest cost on the borrowed funds. However, if the expected income does not cover the costs of holding those investments then an appreciation of the capital value of the investment will be required to justify the exercise.

This later scenario is known as “negative gearing” – where the costs (including borrowing costs) of maintaining an investment is not covered by the net income being produced by that investment. Such an investment strategy has been quite popular with Australians, particularly when it comes to investing in real estate.

Careful consideration needs to be given when borrowing funds to invest in a low inflationary environment. What may have worked as an effective investment strategy in the past may not necessarily work as well in the future. In response “positive gearing” is gaining more appeal as investors begin to appreciate the risks associated with borrowing to invest.

Nevertheless, borrowing to invest remains an effective investment strategy to be considered as part of an overall financial plan.