Dear reader,
Thank you for your question. The concept your question refers to is that of “gearing”. Simply put, gearing is another term for borrowing in order to invest. Gearing is a great way to generate wealth if the return you can generate from your investment is greater than the cost of borrowing.
In terms of your scenario, the investment you choose should earn a minimum return of over 9% on an annual basis for it to make financial sense for you to withdraw the funds and invest. There are, however, many considerations you need to take into account, and it is advisable to consult with your current financial planner to better understand them before making a decision.
These considerations include:
Liquidity
Depending on the type of investment you choose to invest in, you could forego the flexibility and liquidity of the access bond, which is often used as a savings vehicle for emergency funds. It is important to understand your liquidity position before making any investment decisions.
Cash flow
Removing accessible funds from your home loan will cause your monthly bond repayment to increase, depending on your bond’s interest rate, the remaining term of your bond, and the amount you withdraw. Understanding your budget is an important factor to consider before making this decision.
Borrowing cost
We are currently in a cycle of rising interest rates. Rising interest rates can directly affect your bond repayments if tied to the prime rate. These increases will also result in an increase in your monthly repayment. It is therefore important to understand whether your budget has the necessary capacity to allow for possible future increases in interest rates. Keep in mind that these interest rate increases increase the cost of borrowing and therefore the required rate of return on your chosen investment should be able to surpass this higher rate to maintain its relevance. financial and its relevance.
Income tax
Depending on the nature of the investment chosen, you will need to be aware of potential taxes that may apply to returns or income generated.
These taxes could potentially eat into some of the return on your investment and you will need to take this into account when determining the return required to cover both your cost of borrowing and the amount above this figure that justifies the risk taken.
Although there is no way to know or guarantee that an investment opportunity will outperform your required benchmark by 9% in order to justify withdrawing funds and reinvesting elsewhere, be sure to understand at both the investment opportunities and the possible consequences of accessing this financing so that you are comfortable with both parts of the equation before making a final decision.
It is important to discuss your financial plan with your financial advisor to better understand how all of these factors will affect you and any decisions you will make.