What is Investment Lending?
It’s a common myth that you ‘need money to make money’, holding many would-be investors back from kicking off their portfolio. In fact, many notable entrepreneurs throughout history have risen to their fortunes with minimal initial cash holdings, instead they have borrowed the funds required for investment purchases. Of course, this borrowing must be carefully considered to assess serviceability on top of general living expenses and primary residence loan liability.
This is where the term ‘investment lending’ comes into play – the practice of borrowing money to invest in income producing assets. Income, in this instance, refers to either direct income by way of rent, dividend or distribution or capital gain – where assets appreciate in value over time.
The most common example of investment lending is the investment property market, where an investor has the ability to borrow money form a lender (traditionally a bank) to purchase a property. This style of lending is what is referred to as negative gearing, where often interest on borrowing for investment purposes and direct expenses incurred can be claimed as a tax deduction while income (or rent) is declared. While negative gearing means expenses exceeds income (on the asset) creating a negative offset (or greater tax deduction), the kicker is the potential capital appreciation over time as witnessed in some domestic property markets.
Another form of investment lending is the margin loan option. More suited to the savvy investor, margin loans enable the borrowing of funds to purchase shares and invest in managed funds, using existing (or ‘to be purchased’ share assets) as security. Simplistically, if you fail to meet the margin loan repayments, your share portfolio can be sold by your lender to recoup the loan.
With the rise in popularity of Self-Managed Super Funds (SMSF), the increase in borrowing through these funds has also been apparent. SMSF loans are known as Limited Recourse Borrowing Arrangements (LRBAs), where the investment (predominantly property) purchased is then held in a trust for the borrower’s future use. These loans are called ‘limited recourse’ based on the instance where the investor defaults on payments, the lender can only retrieve compensation from the actual asset and no other asset within the SMSF/trust.
When seeking advice for Investment Lending, you should always discuss with a licensed professional to find the right solution to suit your situation and lifestyle needs. Loan Studio Financial Advisor, Brendon Honeyford will develop an individual risk profile for you, discuss your future goals and then make recommendations on appropriate investment strategies.
