Action plan for low interest rates

Borrowing at a time of low interest rates to invest can yield high returns in the long run.

Although borrowing to grow a portfolio of shares or a managed fund is risky, if investors have a secure income stream and extra funds, the results can be very favourable.  Diversifying the investment may be a way of lowering potential risk.

Negative gearing

Taking a loan out can help reduce an individual’s tax liability.  To receive these benefits, the investment must be negatively geared; that is, where the borrowing costs (interest and fees) are greater than the profit received (rent or dividends).  The result is that an individual can then deduct the overall losses from their total taxable income, therefore reducing tax.

Note that this is considered a high risk strategy and it is always recommended that professional advice is sought before the transaction is entered into.

Positive gearing

When the income received from an investment is greater than the expenses, the individual must pay tax on the total net income.

In the case of property, the amount of positive funds flowing back can be increased by taking advantage of capital allowances (building depreciation).  This is subject to the age of the building and preparation of an assessment by an appropriately qualified quantity surveyor.

Review loans

Take a three-point approach to reviewing and renegotiating long and short term debt.  Consolidation of debt, particularly expensive debt such as credit card and personal loans into lower cost facilities is an excellent start.

In a competitive market, many lenders are prepared to offer attractive “honeymoon” rates but can then become increasing expensive over time.  Refinancing existing facility, including challenging the lender for a better rate is another means to improve your position.