Should we borrow $500,000 and invest it in shares?

My partner and me (45 and 38) are both in the top tax bracket and contribute the maximum into super each year. We have a mortgage of $1.6 million, but due to offset accounts we effectively owe only $450,000.

We also have a loan of $500,000 at 6.29 per cent, which is currently undrawn. We are thinking of using this to invest in ETFs. We would pay down the loan over 10 years then sell the shares, clear our debts and fund some renovations. Is this a good idea, or should we focus on paying off our mortgage first?

Borrowing to invest is certainly a key wealth creation strategy, but it all comes down to your appetite for risk.Credit: Simon Letch

Your 10-year time frame is appropriate for the gearing strategy that you are contemplating. Over that period you should anticipate two or three years when the value of your portfolio declines, however, the gains generated in the other years should lead to a positive outcome for you.

Your thoughts around using ETFs is also wise, given their ability to provide very low-cost diversification.

Borrowing to invest is certainly a key wealth-creation strategy. Borrowing to invest in property is well-established, yet borrowing to buy into shares offers many advantages. There is the potential to sell a portion of the portfolio rather than the entire asset should unexpected events arise.

If the investment needed to be sold quickly to pay out the debt, this can be done with shares very efficiently and with minimal cost. There are no maintenance costs or other headaches associated with shares. And there’s no land tax or council rates to be paid either.

Historically, the main way people geared into share market investments was via margin loans. These loans presented some risk if poorly understood. Using the type of facility you outline here, with mortgage-like interest rates, changes the game considerably.

For a gearing strategy to produce a positive outcome for you, the total return – income plus capital growth – must exceed the cost of money. A couple of years back, in a low-interest-rate environment, this was a pretty safe bet. At today’s rates, it’s not such a clear winner.

You mentioned that you’re in the top tax bracket, and that is significant. The interest expense on the loan will be tax deductible, which roughly halves the cost of money in your case. Of course, investment earnings will be taxed, but some intelligent portfolio construction, with a bias towards capital gains over income, is likely to produce a good outcome.

It’s important to appreciate that any investment entails risk, and borrowing to invest magnifies that risk. Regardless of what unfolds with your investments, the bank will want its money back. Over a 10-year time frame, the odds are in your favour that this investment will produce a positive outcome for you, but there are no guarantees.

If you instead focus on paying off your mortgage, you are guaranteed to save the interest rate on that loan. The answer therefore comes down to your appetite for risk.

I’m 76 and retired, with about $800,000 in a self-managed super fund (SMSF), all in shares – some doing well, others not so much. How hard would it be to close my SMSF and join a regular super fund?

Not hard at all. Assuming you’re in pension phase, there’s no capital gains upon the sale of the shares, so you would liquidate the holdings, have your accountant prepare a rollover benefit statement, then have the cash rolled to your chosen super fund. Your financial planner can get this done for you.

Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the podcast Financial Autonomy. Questions to: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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