Party Time for Investment Borrowers

Posted on May 29th, 2013 · Posted in News

It’s party time for people who borrow money to invest, but how long will the party last?  While interest rates are falling and investments are growing, it pays to have a sober view of the future.

Property investors love falling interest rates, and have also been helped by rising rents and a welcome rebound – albeit slight – in house prices.  For share investors the party’s been wilder. Some of Australia’s biggest stocks, including Wesfarmers and Westpac, are up more than 40% over the past year, and investors are enjoying rising dividends that easily cover their interest cost.

The common way to borrow to invest are through margin loans, where shares are the loan security and interest rates are about 7.7%, or you could look at a home equity loan with even lower mortgage rates near 6.0%.  Interest for investment loans is tax-deductible, meaning the real net interest rate for investors is as low as 3.2%.

But many investors discovered during the global financial crisis that when shares go backwards fast, borrowers feel a whole lot more pain. The hangover is ongoing for many, who are yet to claw back their losses.  Analysts and economists appear split about whether shares and property will rise or fall in the next year, so tread carefully when borrowing to invest.  Remember that it magnifies gains and losses, so only do it if you can sleep at night if your assets go into reverse.

In the meantime, enjoy the party, because the Reserve Bank and blue-chip stocks are picking up the tab.

If you’re thinking of making hay while the sun shines by borrowing to invest contact us today for a FREE finance review.  We share your vision and are here to help strengthen your financial future.