Gearing is the strategy of using borrowed money to purchase additional investments. The main benefit is that the size of your investment portfolio can be increased, as well as allowing greater diversification of you investment portfolio, by using third party capital. Gearing may also reduce tax as the costs of investing including interest, are generally deductible.


However, while gearing has the potential to magnify gains, it can also magnify any losses suffered if the value of your investments falls. Therefore, you should consider getting professional advice before borrowing money to invest, to confirm (or otherwise) that this is suitable investment strategy for your individual circumstances.

Margin Loans

By borrowing to invest, or gearing, margin loans increase the amount of money available to you to invest and therfore increase your potential returns as well as magnify your losses if the market falls. However, as with any loan, it’s important to make sure you take a long term view as well as keep in mind a few simple safeguards that may help to reduce risk of loss.

How do you manage margin loan risk?

1) Invest in quality assets

By investing in high-quality shares and managed funds one can reduce the risk of a major loss or margin call. That’s why it’s always a good idea to talk to an experienced and a qualified advisor before choosing investments.

2) Borrow less than your total loan limit

Limiting the amount you borrow is the secret to successful gearing. This makes sure you can easily meet your regular interest payments and cope with any sudden financial emergencies.

3) Repay and re-invest

Regularly paying your loan interest helps to stop your loan balance from increasing. Not only does this reduce the risk of a margin call, it gives you the flexibility to invest more money if an attractive opportunity crops up.


Re-investing your distributions or crediting them against your loan also helps to reduce your loan balance.

4) Be aware of timing

There are several timing issues that can add risk to your margin loan:

  • your distribution payments may not coincide with your interest payments
  • the lending ratio of any investment that you’re borrowing against can change as the value of your investment changes (including reducing to zero) – this can mean a margin call or the cancellation of transactions.

In some circumstances, you may have to repay the loan immediately. This can be the result of:

  • a significant fall in the market
  • the delisting of a company you have invested in
  • a default by a joint borrower
  • a default by a third party who provides security for your loan

A PGFS financial adviser can help you secure determine whether a margin loan is appropriate.

Home Equity Gearing

If you are a homeowner you may be able to borrow against the equity in your home and then use the money to buy investments. The equity in your home is used as security for the loan, not the investments. You may find this less daunting and interest rates are usually lower than for a margin loan.

Geared Share Funds

Geared Share Funds are ‘internally’ geared managed funds with investment strategies focused towards listed equities. Basically, the fund manager uses the fund’s assets to support the borrowing.


The investor’s liability and loss is limited to the amount they invest, so there are no margin calls for investors to meet. As such, in the worst case, you total investment may suffer but, unlike a margin loan, there is no requirement for you to service or repay any residual loan.


PGFS can provide you with clear and appropriate advice when considering a geared component as part of your wealth accumulation strategies. We will consider your personal circumstances, including such specifics as surplus cash flow and investment timeframe, when advising you in this area of your financial affairs.

Negatively Gear an Property Investment

A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and capital depreciation – exceed the income it produces.


Your investment must make an income loss before you can claim a tax benefit. Therefore, it is critical that you select a property whose capital value will increase over the period in which you intend to hold it.


As a general rule, only investors with the financial capacity to absorb the effect of potential falls in property values, as well as an increased cost in interest payments, should consider negative gearing.


You can minimise the risk of gearing by:

  • choosing your investment property carefully. You need to try and select a property that is likely to increase in value throughout the investment period
  • having a sufficient income generated via rental to cover the interest repayments
  • taking out mortgage protection insurance with your investment loan.

Positively Gear a Property Investment

You can also positively gear a property. This occurs when the investment income exceeds your interest (and other possible deductions) expense.


Note that you may be subject to additional tax on any income derived from a positively geared investment.


A PGFS Financial Advisor can asssist in helping you determine whether property gearing is appropraite for your individual circumstances.

Contact Information



Address: 1 King William Road

Unley, South Australia 5061


Phone: 08 8373 7277

Fax: 08 8357 0366

Facebook: PGFS


Address: Suite 13. Terminal 1

396 Stuart Highway

Winnellie, Northern Territory 0820


Phone: 08 8373 7277

Fax: 08 8357 0366