Borrow to get ahead

You can boost your returns by using someone else’s money, but the payoff is not without risks

- DAVID THORNTON

Borrowing to invest is par for the course for many Australians: achieving the dream of owning your own home requires, in most cases, a loan. But should you borrow for other investments?

Borrowing provides the potential, but not a guarantee, of generating greater profits than you would if you only used your own cash. In a perfect world, it will see you make money using someone else’s money.

For instance, 15% growth on a $1000 investment funded with your own money is $150 in capital gains. However, borrowing another $1000 to invest doubles this gain. In addition, larger initial investments will compound to larger returns sooner.

Borrowed funds can also provide benefits that partially mitigate risk in your portfolio by lowering concentration risk through diversification.

“While borrowing to invest is often associated with residential property, it is also used by investors seeking diversification into other asset classes such as shares, exchange traded funds and managed funds,” says David Morrissey, head of margin lending and online products at BT Financial.

In other words, if your portfolio is dominated by banking and commodity stocks, and you don’t wish to sell any of your current assets, then you can borrow to invest in other sectors such as international shares.

“This can be achieved with the use of specialist facilities such as margin lending or accessing available funds within an investor’s housing loan facility,” says Morrissey.

Recognise the risks

Borrowing to invest will grow your wealth at a faster rate, so long as the market is going up. Down markets, on the other hand, wreak havoc on investments using borrowed money.