Instalment gearing is fast becoming the ultimate starter strategy for the capital-challenged, novice investor focused on building wealth. Buzz words such as ‘set and forget’ and ‘user-friendly’ sum up its marketability.

“Instalment gearing can be done very cost effectively and has an amazing application for a wide range of people,” says Peter van der Westhuyzen, Head of Sales and Marketing, Macquarie Investment Lending.

“It’s ideal for anyone from a young person in a first job, to a middle manager starting a family and wanting to save for school fees, to a grandparent aiming to give grandchildren a head start in life and it’s perfect for people with mortgages because the instalments are little and often so they can be met while honouring other commitments.”

Macquarie defines instalment gearing as margin lending plus regular savings.

As a concept it began around 15 years ago and grew out of traditional gearing strategies of borrowing to buy managed funds through products such as margin loans.


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The downside with margin loans is that most lenders stipulate a minimum loan of $20,000 to $50,000 and they’re generally seen as a one-off investment, not part of a regular savings program.

Instalment gearing products differ from ordinary margin loans in that the client puts up an initial investment (in some instances the minimum can be as low as $1000), this is matched by the lender and the combined amount is invested in shares or managed funds. The investor continues to borrow to supplement regular savings, which are put into shares or managed funds.

This drip-feed process (savings plus a small amount of borrowings each month) is a relatively stress-free, risk-free (significant buffers are usually built in to allow for a market correction) and potentially tax effective way to build up a portfolio over a period of time.

“Instalment gearing is often referred to as a monthly savings plan,” says van der Westhuyzen. “Instalment gearing just means a monthly savings plan structure with a bit gearing or debt underneath.”

A significant benefit of instalment gearing is a technique called dollar cost averaging. Basically, this involves investing a fixed dollar amount at regular intervals – as opposed to throwing in all your funds at once. By doing so, the average purchase price should be lower.

“Instalment gearing, or as we call it regular gearing, takes away the research and guesswork because you’re investing in a managed fund – so a fund manager looks after everything on your behalf,” says CommSec’s Executive Manager of Margin Lending, Brian Phelps.

While some investors might have traditionally been wary of margin lending, Phelps states that instalment gearing is a way to dip your toe in the water. “Borrowing money to invest in the market has been a concept that has taken people a while to get hold of,” he says.

“In the past in Australia investment has been into property. Now one of the big growth areas is the margin loan. Margin lending has been growing at around 38 per cent [per year] and instalment gearing is a means of easing your way into it.”

While maintaining that the concept of instalment gearing is not difficult to grasp Phelps defends CommSec’s policy do a suitability test that incorporates knowledge of the equities market, margin lending and regular gearing.

“Clients need to understand the concept up front,” he says. “If they show no understanding of how instalment gearing operates we knock them back.”

CommSec is keen on investor education and believes that the gearing levels adopted by investors should be fairly conservative. “The last thing we want is for people to dive in and overcommit themselves,” says Phelps.

Risk is relatively low with instalment gearing but as with any geared strategy it is a factor. Macquarie Investment Lending’s van der Westhuyzen says two of the key risks are interest rate hikes and the possibility of a margin call.

“What that means is your portfolio gearing level, which is your loan to value ratio (your level of debt versus your level of equity), needs to be monitored because if it becomes too high we may margin call. That could result in selling part of your portfolio to restore the loan to value ratio to the required level,” says van der Westhuyzen.

“That can happen quite quickly and it generally happens at the worst possible time at the lowest part of the month.”

Van der Westhuyzen’s tip is that diversification is a great way to manage possible margin call risk and investment risk, not borrow beyond your limit and ensure income protection and life insurance is in place.

Until May this year managed funds was the only option for instalment gearing. But now Merrill Lynch’s BlueChip20 product allows investors to instalment gear into a direct share portfolio.

To open a BlueChip20 account, investors require a minimum start up equity contribution of $5000, which is matched by a minimum start up loan of $5000, resulting in an initial minimum investment of $10,000.

BlueChip20 was stgised specifically for the investor who typically has $20,000 to $30,000 to invest. According to Vice President, Merrill Lynch Equities, Derek Bennett, this is the type of investor who would often walk into a financial planner’s or stock broker’s office and more often than not be turned away.

“Previously the only way to run an instalment gearing strategy for a small client who wants to drip-feed a smallish amount every month was into a managed fund. The reason for that was because to do it into a direct share portfolio required brokerage,” says Bennett.