I am often asked by clients whether leveraging debt for investment is a good idea. My answer is always the same – it depends on your individual financial situation and goals.
What is leveraging debt?
Leveraging debt means using borrowed money to invest in assets that have the potential to generate income or increase in value. For example, taking out a loan to invest in property or shares. The idea is that the income or capital gains generated from the investment will be greater than the cost of the loan, resulting in a profit.
While the potential for profit is attractive, leveraging debt can also come with significant risks. It is important to have a thorough understanding of your financial situation and goals before considering this type of investment strategy.
Firstly, it is important to have a stable income and a good credit history. Taking on significant debt without the means to repay it can lead to financial stress and potentially ruin your credit score. Additionally, it is important to have a long-term investment strategy in place, as short-term market fluctuations can result in losses.
Another consideration is interest rates. Interest rates can fluctuate and impact the cost of borrowing. It is important to have a plan in place for how you will manage any interest rate changes and have a buffer in place to cover unexpected costs.
Despite the risks, leveraging debt for investment can be a successful strategy for those who have the means and the knowledge to manage it. It is important to work with a financial advisor or mortgage broker to understand the potential risks and benefits and determine whether it is the right strategy for you, and having the right insurance policies in place is very important to protect you in the event you are no longer able to earn an income. I go into more detail about this in my podcast episodes, listen here.
In summary, leveraging debt for investment can be a viable strategy for generating income or capital gains, but it requires careful consideration and planning. As a mortgage broker, it is my role to help clients understand their options and make informed decisions that align with their financial goals. Book a call with me today to see how the numbers work for you.
