Debt Management and Leverage
Gearing into investments
Second gearing example
We will now demonstrate the outcomes of gearing versus non-gearing.
The following two examples show the outcomes of changes in portfolio values, and what this means to overall performance.
The assumptions for the examples are that:
- the return to you is the increase in your money less interest and costs, with an interest rate of 8%
- no consideration has been given for potential tax benefits from negative gearing
- the Loan to Valuation Ratio (LVR) is the loan divided by the portfolio value
- the gearing ratio is worked out by dividing the borrowings by your money.
This example shows an investment of $10,000 with no borrowed monies. The example on the following page shows what happens if we combine our cash with some borrowings.
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