Lately, mortgage brokers in Rockingham, Kwinana and Baldivis are answering a lot of questions about gearing. Most people think there are two kinds of gearing: positive and negative. But there is another level on which there are three types of gearing. Gearing simply means “borrowing to invest.” This allows investors to have investments without having to pay the entire amount. Here are the three types of gearing.
Investment Loan Secured by Property
This is what most small property investors do. You have to pay the deposit, usually between 5-10%, and the loan is secured by the property. Often, homeowners will borrow against the equity in their own homes to come up with the deposit money and take a separate loan for the property itself.
Loans secured by property have the lowest interest rates and best terms because the lender has recourse if you default.
Margin Loan Secured by Investment
The mechanics of a margin loan are almost the same as those of a home mortgage. Your finances are evaluated to determine your ability to make your loan repayments. However, the margin loan isn’t attached to the equity in your home. Instead, the investment you make secures the loan.
The lender will provide you with a list of investments that they deem suitable. These will usually consist of managed funds and direct shares. Each investment has a recommended gearing ratio. This means that you will have to make a deposit on the investments based on the percentage the lender demands.
The lender can make a “margin call” if your investment value falls below the ratio they want. You will be expected to sell some of the shares and pay the lender to reestablish the ratio and an appropriate level.
Investments with Built-In Gearing
These include investment warrants and geared managed funds. Gearing is taken care of for you.
Call Smartline Rockingham
Call Smartline Rockingham for more information or to obtain an investment loan: (08) 9527 1800.