Steve Mickenbecker of Canstar explains how it works: “Let’s say most first-time buyers of a home borrow with 20% equity, which is an 80% loan-to-appraisal ratio. They put in $ 100,000 and the bank put in $ 400,000 and the house is worth $ 500,000.
“When you’ve owned the house for a while and you’re making repayments and the home’s value has gone up, you could be in a position where your equity is, say, 30% and provided you have a income to fund a larger loan, the bank might say, “Well you’ve got the income, you’ve got enough equity, we’ll allow you to borrow an additional $ 100,000 to reduce your home equity again to 20%. “,” Says Mickenbecker.
You then use that money to buy stocks. Instead of slowly buying small plots of stocks as you save, you put a large amount of money up front to gain access to compound returns and instead use your future excess funds to pay off the loan. debt. This is called “the leverage” or “the gear”.
But wait, there is more.
In this case, the interest you pay on the investment loan can be deducted from your personal income as a tax deduction.
Sounds too good to be legal? No, according to ATO Assistant Commissioner Tim Loh: “It’s something that we see people doing. However, you can’t just buy stocks and claim some of your mortgage interest as a tax deduction (I asked). “You can’t do it because you don’t have a record to track how that money is connected,” says Loh.
So how do you do it?
“You have to create a separate loan account and then use that account for a particular investment, whether it’s stocks or exchange traded funds. That way, you can keep track of the interest invested in that loan – the interest you can claim as a deduction. “
If you do this, says Loh, you may also be able to claim other costs of building your portfolio, such as investment review subscriptions, bank charges, brokerage fees, and ongoing advisor fees. financial (although not the initial cost of advice on setting up a loan).
“If you’re somehow doing it passively – you’ve just invested it and you’re not actively managing the investment portfolio – you probably can’t claim a deduction,” Loh warns. “But if you do a little more and the amount of capital increases over time, then you absolutely can. “
Okay so you can do it. Corn should you?
“It depends on whether you think the stock market is going to go up or not,” says Graham Hand, editor of Firstlinks. And that, in the short term, is for everyone to guess.
Hand cautions against the potential losses of ‘leveraged’ investing: “Let’s assume a fairly simple example of someone betting on what you would call 50%. So let’s say they put $ 100 of their own money, borrow $ 100, and therefore invest $ 200 in the stock market. “
“Because their own money is $ 100, but they put $ 200 in the market, if the market drops 50%, they don’t lose 50% of their own money, they lose 100%. “
Hand saw it very badly for “leveraged” investors: “I was running a gear business during the global financial crisis and the losses were horrendous… a lot of people panicked. So, this is not for the faint hearted.
But what if I just don’t sell? It’s simple to say but harder to do, Hand warns.
“If you talk to someone who has worked in a fund management company, they will tell you that redemptions are at their peak when the market is down and demand is at their peak when the markets are at their peak. It’s just people’s optimism, ”he says.
The MoneySmart website, operated by the business regulator, the Australian Securities and Investments Commission (ASIC), offers this tough advice on borrowing to invest: “Some lenders allow you to borrow to invest and use your home as collateral. Don’t do that. “ (The font in bold is from ASIC.)
I checked with Laura Higgins from ASIC, who runs the MoneySmart website, who clarified that this is advice for newbie investors.
“Some investors would absolutely use the equity in their home,” Higgins explains. But, for new investors or those with less secure income, offering their home as collateral is no easy task.
“The question of a new investor putting their house in jeopardy is, I think, important. Can you imagine a young person starting out and then compromising his position in the housing market because he loses his house? “
“I think when you start investing, you first need to understand where your money is, what you can afford to invest and what is right for your personal situation,” she says.
Canstar’s Steve Mickenbecker is also cautious.
“People talk about the moral hazard of low interest rates and that is exactly one of the moral hazards. People look at it and say it’s so cheap to borrow, surely I can make money out of it and they take too much risk. “
For me, I’ll cool off the idea for a while and revisit it a bit further when I’m more confident in my budget and investment. Lots of food for thought!
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about financial products. They should seek advice from their own professional before making any financial decisions.
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