Gearing means borrowing money so you can invest in a greater range of assets and earn potentially higher returns.
Some benefits of gearing include:
1. Access to higher yielding assets: gearing can provide investors with access to assets they may not be able to afford. For example, commercial property may provide higher rental yields compared to residential property or other investments.
2. Diversification: gearing enables you to diversify your portfolio by investing in a range of assets. This can also help to reduce risk by spreading investments across different asset classes and sectors.
3. Tax benefits: you may be able to claim a tax deduction on the interest payments of your loan to reduce your taxable income.
4. Tax credit on dividends: if you choose to invest your borrowed money into shares, you may receive a tax credit on the dividends you earn (known as 'franked dividends'). This means you could be paying a small amount of tax on this income which can have a positive effect on your cash flow.
5. Protection against inflation: gearing enables you to access assets that are likely to appreciate over time.
6. Long-term investment: gearing can be a suitable strategy for investors with a long-term investment timeframe. The benefits of compounding returns and capital growth can outweigh the costs of borrowing money.