Do you often hear your fellow Doctors talk about how they’re applying for finance to invest in residential real estate to build their property portfolio? If you’ve also been thinking about borrowing to invest as an option, you might already be considering your next real estate investment too.

However, when it comes to investments, there’s no one-size-fits-all. Every individual has different goals, risk tolerances and financial positions which means different investment options may be more appropriate or perform better for you. So, before assuming that borrowing to invest in residential real estate is also the best choice for you, it’s important to look at other investment options, such as shares, managed funds and commercial property, as well as the range of borrowing options.

Here is some general information about borrowing to invest to help you.

What is borrowing to invest?

Borrowing to invest, also referred to as gearing or leverage, involves using borrowed funds, such as a mortgage, redraw, equity release or new loan, to purchase investments with the intention that they will provide higher returns than the costs of investing in them. Borrowing also may allow you to access investments that you wouldn’t otherwise be able to afford.

When it comes to selecting how to borrow, you have multiple different options, including:

A personal loan

You can apply for a small personal loan with a bank or other lender to borrow to invest, depending on your goals and financial strategy. Typically, the money you borrow must be repaid over a fixed term with interest. The benefit of this type of loan is that it’s paid off over a defined period so you are able to budget with certainty. Personal loans tend to have a maximum borrowing amount of $50,000 so may not be appropriate for all types of investments. Just keep in mind that fees could also apply, and the rates are typically higher given the money is unsecured.

Redraw on your mortgage

If you have a current mortgage, such as one on your home, then depending on your lender and whether you have redraw activated, you can utilise amounts already paid off to reinvest. The benefit here is that there may be fewer processes involved as it’s already your loan. Alternately you can use the opportunity to revalue your property and access any additional equity by way of a new loan application at your current lender or review your existing property portfolio via a broker and move to a more competitive funder at a more competitive rate. Another potential advantage is the interest rate tends to be more competitive when compared to a new loan.

Investment loans

For a medium to long-term investment strategy, borrowing to invest may involve margin loans for shares or managed funds and investment property loans. A margin loan involves borrowing money to invest in shares, exchange-traded funds (ETFs) and managed funds. They allow you to pay only a fraction of the cost of the shares upfront but requires you to keep the loan-to-value ratio (LVR) below an agreed level. The type of investment asset you acquire often serves as the security for the loan. It’s also important to remember that you’re still required to repay the investment loan and interest even if the value of your actual investment falls.

The benefits of borrowing to invest

Borrowing to invest provides you with the funds you need to select investment options that unlock the potential of higher returns. The ability to borrow extends your investment capacity beyond just using your own money, allowing you to build a portfolio with the objective of earning strong returns on investment.

In some ways, it is like reverse saving, where you borrow the money and invest it and then repay it, rather than saving small amounts and waiting to invest.

Most importantly, you can access potential tax benefits. As a Doctor who typically has a high marginal tax rate, you can receive tax deductions on your interest payments and certain costs of borrowing, however that’s only if the investment generates income. Tax deductions differ for each investment type, so it’s important to speak to a financial adviser about what options are right for you.

How can you take full advantage of borrowing to invest?

Often Doctors choose to invest in residential property, however, there are many investment options for you to consider, such as:

Shares

Investing in the sharemarket may suit certain individuals and can be a smart way to diversify your investment portfolio based on your financial goals. While the sharemarket can be volatile in the short term and therefore requires a bit of vigilance and management, shares offer the potential to earn dividends and capital growth over time.

Managed funds

A managed fund is where your money is pooled together with other investors to access a wider range of investments to meet your financial objectives. Managed funds are accessible, with low barriers to entry, they can be invested domestically and internationally, and they are managed by investment experts, which means you don’t have to spend extra time organising it yourself. Managed funds can provide a regular source of income depending on the asset class that the managed fund invests in, as well as capital growth potential over time too.

Commercial Properties

Some Doctors choose to purchase commercial properties or develop their own medical practice premises as they potentially offer more certain income returns than residential properties. Business tenants are typically more stable and longer-term than residential tenants and the rental income tends to be higher, providing a way to pay down a loan faster. In addition, maintenance fees, repairs and salaries on your commercial property are deductible expenses that can offer tax benefits. However, you will generally need a higher deposit to access this type of investment.

General tips

  • Before you borrow to invest, make sure to evaluate how it will affect your personal cash flow, finances and taxes. Do you have the cash flow to make the repayments required, if the investment failed to generate income?
  • There are a lot of competitive loan products on the market today. Shop around and make thorough assessments. Don’t limit yourself to your usual lender or trading platform.
  • Did you also know that your SMSF may be able to borrow to invest? Speak to your financial adviser to look into this option.
  • Learn to diversify your investments, so you can minimise risk in your portfolio.

Is borrowing to invest right for you?

What has worked for other Doctors may not always work for you. Fortunately, you have plenty of borrowing to invest options available to consider.

While your colleagues may see great returns from investing in residential property, it may not suit your circumstances, whereas investing in commercial properties or shares may. There are also instances where borrowing to invest can be detrimental to your finances. The above is only general advice and doesn’t take into account your financial situation, objectives or needs, so to learn more about the most suitable investment options for you, it’s best to seek the help of financial experts.

At Doctors Wealth Management, we are financial planning professionals who can give you tailored advice about borrowing to invest and discuss the kinds of investments that align with your financial goals.

Get advice that suits your situation

This factsheet is a guide only. The team at Doctors Wealth Management can review your situation and recommend a solution for your individual circumstances. You can find additional resources and information about Doctors Wealth Management at doctorswealthmanagement.com.au or call 1800 128 268.

Important Disclaimer: The material contained in this publication is of general nature only. It is not, nor is intended to be legal, accounting, tax or financial advice. Doctors Financial Services Pty Ltd (DFS) and its related entities have not considered your individual objectives, financial situation and needs in providing this information. If you wish to take any action based on the content of this publication, we recommend that you seek appropriate professional advice. While we endeavour to ensure that this information is as current as possible at the time of publication, we take no responsibility for matters arising from changed circumstances, information or material. DFS and its related entities will not be liable for any loss or damage, however caused (including through negligence), that may be directly or indirectly suffered by you or anyone else in connection with the use of information provided. Doctors Wealth Management is a registered business name of Doctors Financial Services Pty Ltd ABN 56 610 510 328 AFSL 487758. Doctors Wealth Management Financial Advisers are Authorised Representatives of DFS.

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Important disclaimer: The material contained in this publication is of general nature only. It is not, nor is intended to be legal, accounting, tax or financial advice. Doctors Financial Services Pty Ltd (DFS) and its related entities have not considered your individual objectives, financial situation and needs in providing this information. If you wish to take any action based on the content of this publication we recommend that you seek appropriate professional advice. While we endeavour to ensure that this information is as current as possible at the time of publication, we take no responsibility for matters arising from changed circumstances, information or material. DFS and its related entities will not be liable for any loss or damage, however caused (including through negligence), that may be directly or indirectly suffered by you or anyone else in connection with the use of information provided. Doctors Wealth Management is a registered business name of Doctors Financial Services Pty Ltd ABN 56 610 510 328, AFSL 487758. Doctors Wealth Management Financial Advisers are Authorised Representatives of DFS.

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