Gearing or Margin Lending
Margin Lending is simply the act of borrowing money to add to already existing funds, which are usually then invested in assets such as property or shares. The principle of this is that the higher the investment amount, the higher the return.
For an example, a house may be purchased, and then leased. The rent is lower than the interest, the bills and so on, however, the owner hopes their asset will appreciate in value (this is negative gearing). Also investors can claim the excess of interest paid on borrowing as a tax deduction, which can be claimed against other taxable interest received. In this way, although they are making losses in the short term, they hope to make a profit in the long run. When most people think of gearing they think of residential property, however, the potential profit can often be higher in other investment areas. Shares can be security for a loan just as property can be, the lending ratio’s are similar. Gearing is most effective over a long period of time, so if you are considering this investment option, you should have at least a five year period in mind.
