This term might seem gobbledegook but the concept is pretty simple. Moreover, it is a great option for investors who are looking for an investment property. Get ready for a basic lesson on investments.

Negative gearing - what is it?

For people working in investments, ‘gearing’ is another word for borrowing to buy. For investments in properties, it means getting a loan from a bank or other financial institution. Negative gearing means paying more in interest on the loan in comparison to income generated from renting out the property.

For example:

• You buy a home for $500k

• You secure a bank loan of $400k with an interest rate of 5%

• This means you need to pay $20k per year

• If you rent out this property of the sum of $400/week, you will generate $19.2k a year.

• This means you will be at a loss of $800 each year without factoring in expenses like repair costs, insurance etc.

Why would this be a positive thing?

There are many positive actually!

Wider choice

Negative gearing makes it easier for people to invest in a property. There is very little market for positively geared or neutral properties so with this system, there is a bigger scope for people to have the chance to own a property as a long-term investment.

Capital growth

This refers to the value of your property increasing over time. In most cases, the value of a property will increase over time. This means that you can make a profit from selling your property and you might even be able to do this after a few years, which will offset any most lost with the negatively geared loan.

Reducing your taxable income

You can deduct tax from ongoing expenses like maintenance costs and interest on your loan. You can claim these costs against your annual income, which means you will pay less tax.

If you want to know more about negative gearing, get in touch with one of our experienced mortgage brokers. They can help with all things to do with negative gearing. It’s not the sort of technique to use ad hoc, you really should discuss this with a professional.