Borrowing to invest can be an effective wealth creation strategy.

If the interest costs exceed the income (eg. dividends, franking credits, rent) produced by the investment, it is said to be ‘negatively geared’. The excess interest expenses are usually tax-deductible.

Many promoters of negative gearing focus on the tax deduction. However, negative gearing will never turn a bad investment into a good investment. In fact, it can turn a good investment into a bad one.

Gearing increases investment risk. It should only be undertaken by those who understand how gearing works, can identify the investments that are suited to gearing, and can accept the greater risk.

Investment loans are structured and managed differently to lifestyle loans. For example, they may be ‘interest only’. Paying them off is usually less of a priority, provided they are backed by an appreciating asset, and the gearing strategy maximises tax benefits.