Negative Gearing and Interest Rate Rises

Most people who purchase properties these days require finance in order to do so.

Whether the property is going to be your own home or as an investment property, borrowing or ‘gearing’ as it is commonly known is one of fastest ways to magnify your profits and increase your overall wealth.

Over the past few years many financial advisers and accountants have harped about the benefits associated with gearing and why not, it all sounded reasonably straight forward.

For a property worth say $300,000 all you needed to do was to save a deposit of 10% or $30,000 and provided you were not considered a risk by the bank, they would tip in the remaining $270,000 by way of loan.

This financial strategy left the alternative of simply investing your hard earned savings of $30,000 for dead as you now had $300,000 working for you. Earning a capital and revenue return of say 15% on a $300,000 investment sounds much more attractive than earning the same 15% return on just $30,000!

In addition to the gearing benefits and provided it was your first property, and your intention was to live in it, Government’s threw in a whole range of goodies that included the First Home Owners Grant and Stamp Duty Exemptions.

If on the other hand the property was to be an investment, then any loss you made by offsetting your rental income against interest and general property expenses will put you in the running to obtain extremely attractive tax concessions from the ATO in the form of an often sizeable  tax refund.

However, as many people are now fully aware of, negative gearing is not all cookies and cream. It’s a common story for both young and old who have suffered through negative gearing by not knowing when to cut their losses and move on.

This has been primarily due to the fact that their financial situation has not been structured correctly from a tax point of view or that they have simply lost focus on the principals of saving and making money. Often people have dug their feet in the sand for too long with the expectation that the property market would turn around only to find out that as many of the experts predicted, the recovery of the property market has taken much longer than first anticipated.

Negative gearing certainly does have the potential to maximise profits especially when times are good. The problem is that when times are not so good it has the potential to maximise your losses. Much like a knife, if used in the correct way negative gearing can provide substantial benefits, if on the other hand it is used incorrectly, then it can inflict severe pain on the user.

Not everybody is able to hang in the property market patiently outlaying more and more money in hope that the market will soon turn the tide so that the investor will reap the fruits. In times of increasing interest rates, more and more pressure is applied on the investor and a review of the overall situation to ensure that the strategy is sound and not emotion driven is needed.

If you are like many Australians who are mortgaged to the hilt and feel that another interest rate rise will be the final nail in your coffin, the best thing to do is to talk to an experienced adviser(s) and get some good solid advice.

An experienced adviser can look at your situation from your corner and will not only take into account your financial circumstances but your personal non-financial circumstances as well.

Issues such as lifestyle, cash flow, investment preferences, future plans and taxation aspects are some of the issues that should be looked at on balance if you are to receive comprehensive advice.