Changes in interest rates will impact the estimated outcomes of our advice. Changes to your cash flow should be reviewed by our office immediately as this may impact the appropriateness of our advice. There may be limits on how much you can repay. This is especially the case with fixed loans. You may not be able to redraw these extra repayments in a time of financial need. We have not considered in this advice if your current mortgage is the right mortgage for your situation. This advice only focuses on the cash flow impact to your situation.
30. Commence a Regular Gearing Strategy We recommend you commence a regular gearing strategy to build your investment portfolio. By drawing additional instalments from the loan to invest, you will build your wealth faster and fund it from a combination of your cashflow and margin lending facility. We recommend that you contribute $XXX per month from your cashflow and draw $YYY per month from the loan account. Combined you will contribute $XXX to your investment portfolio in the first year. The recommended investment portfolio will be used as security for the loan. You cannot borrow 100% and each investment will have a different level of finance available (known as the loan-to-value ratio or LVR). [Existing investment portfolio / margin lending facility] This regular gearing strategy will be added to your existing investment portfolio and margin lending facility. [New portfolio / margin lending facility] We recommend that you make an initial investment of $XXX to start the investment portfolio and margin lending facility. Benefits:
Regular investment allows dollar cost averaging whereby the entry price on the investments has the effect of being averaged out over time, potentially reducing the overall cost of the investment. Using debt to increase your investment portfolio gives you access to potentially increased capital growth and income. Loan interest for investing is tax-deductible. You can bring forward this tax deduction by pre-paying the annual interest each financial year. Having a larger investment portfolio with the use of debt allows you to increase the diversity of investments which in turn reduces your risk by spreading the risk across different asset classes
Points to Consider:
Interest rates on margin lending facilities are higher than other loans such as your mortgage. The current variable rate is XXX% and the fixed rate for XX years is XXX%. We have looked at your cash flow to make sure that if interest rates are to increase by 3%, you could still afford to meet the repayments. Please refer to our financial projections at the end of this SoA for further details. Margin loans are subject to margin calls. This means that if your investments fall below the required LVR, you are required to make a cash payment, sell down investments or provide additional security such as investments, to reduce the LVR back within the acceptable limits (to pay down the loan). Margin calls need to be met instantly so having cash or assets available to meet these payments is recommended otherwise the lender may sell down your portfolio to meet the margin call. Based on our recommendations here, we expect the overall LVR of your portfolio to start at XX%. Just as having an increased portfolio size can magnify your gains, they can also magnify your losses when the markets go down. Volatility in your portfolio will be higher. It is important that you are comfortable with this type of strategy. A minimum of 7 years is recommended for this type of strategy. Interest rates are subject to change. [Variable rate] As the recommended rate is variable, the rate can change at any time. [Fixed rate] At the end of the fixed period, the interest rate may have changed significantly, impacting future cash flow. Borrowing to invest requires strong cash flow to support the strategy. Costs can be significant if the strategy has to be unwound prematurely. Please contact our office for immediate review if your cash flow changes.
31. Repay your Non-Deductible Debt We recommend that you repay your non-deductible debt of $XXX from your <Source of funds> account. Benefits:
We estimate that you will save $XXX in interest, when comparing your current rate of return to what you are paying on your loan. We estimate this will reduce your loan term by XX years. Repaying your non-deductible debt will free up your cash flow to direct to your wealth creation goals / to help you focus on saving for retirement / to help meet day-to-day living costs / to meet a specific goal.
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