Gearing
Introduction
The gearing menu helps you set up a gearing strategy for your clients.
To ensure the gearing icon appears in cashflow & capital you need to select gearing as an optional strategy on the Settings page.
Navigate to Modelling > Cashflow and Capital > Settings and tick Gearing.
You will notice that Gearing now appears as an INPUT on the left navigation bar.
When you initially open the gearing page, you will notice that it will be blank and the options will be blanked out.
In order to create a gearing strategy, there are a number of pre-requisites that need to exist.
- An investment must exist within the clients Assets
- A loan must exist within the clients Loans
- Optional: If you are recommending debt recycling, a Home Loan must exist
Example 1: Client has no active loans or assets so both options are greyed out
Example 2: Client has an investment, personal loan and home loan active, both Debt Recycling & Gearing are available options
Example 3: Client has an investment, personal loan however does not have a home loan. Debt recycling is not available for this client.
Debt Recycling
Debt recycling requires an active Home Loan and an investment to be able to create.
Follow the below steps to set up a debt recycling strategy:
- Ensure both a Home Loan and Investment exist for your client
- Click on debt recycling
- In the new pop up prompt, you have a tickbox option for directing income and growth to the home loan
- In the example below, you can see that the income return of the Managed Fund equal to 2.55% pa is being directed to the home loan, the cash/term deposit is not part of this strategy
- You can choose to include income, growth or income and growth returns for any investments
- Navigating to Modelling > Cashflow & Capital > Loans you can see that additional repayments equal to the income return of the managed fund are being directed to paying off the Home Loan debt.
Gearing
As mentioned earlier, gearing strategies require both an active investment and loan.
Click on the + Add button to begin the process. You can add multiple gearing strategies for different loans & investments as required.
This will populate a number of options for you to complete. You will see that for now, no information has come through. Once you have made the specific choices you wish to model, ensure you click Save and refresh for the data to appear.
On this page you can make changes to the following:
- Choosing which Loan and Investment from the drop down lists
- Regular loan drawdowns & regular cash instalments
- Transactions
- Pencil (edit) icon
Regular Loan Drawdowns
Regular loan drawdowns are additional amounts drawn down from the loan - any amount here will subsequently increase the loan by this amount. Funds will be directed to the linked investment account, and only positive amounts can be used here (ie you cannot use this section to reduce the loan balance).
In the example below, we have selected $1,000 per month indicating that an additional $1,000 will be drawn from the loan per month or $12,000 over the year.
Navigating to Modelling > C&C > Loans you can see the additional amounts in the strategy.
This increase of $12,000 per year will be directed to the investment account that has been selected in the drop down. You can see this by navigating to Modelling > C&C > Assets and selecting the specific asset selected in the gearing strategy.
Regular Cash Instalments
Regular cash instalments are additional funds directed into the specified investment account, increasing the overall balance of the selected investment.
Note that this will be included as part of the clients cashflow and have no impact on the default Cash Account.
In the example below you can see additional funds of $500 per month added to the investment account, increasing the value of the investment by $6,000 per year.
You can see the impact of this on the investment by navigating to Modelling > C&C > Assets and selecting the specific investment.
Transactions
Transactions provides additional functionality for both the regular loan drawdown and regular cash instalment strategies.
In the previous sections, we included examples of $1,000 for regular loan drawdowns and $500 regular cash instalments.
Clicking on the transactions button you can see the annual figures for each of these two examples.
The transactions pop up provides you with additional functionality including:
- The ability to make one off drawdowns or instalments, either annually evenly across all months of the financial year or by selecting Show months and setting the transaction for a specific month within the financial year.
- Setting the start and end dates of transactions
- Where there is any indexation for these transactions and if stepped at all
Pencil (edit) icon
The Pencil icon allows you to set up either a manual debt recycling strategy or to select to increase debt by decreasing home loan.
Gearing Strategy Example
In the example below, we have assumed an investment loan of $200,000 which has been used to set up a managed fund of $200,000. Any figures can be used here, and you can also start with a balance of $0 if required.
No other changes have been made at this point, we have just clicked save and refresh to ensure the data appears. You can see the graph and table appear, with details of the investment loan slowly being paid off and the managed fund increasing due to growth/income.
To change the default settings for either the investment or loan you will need to navigate to the Assets and Loans sections of C&C
Increasing debt & investing funds
The user has clicked on the pencil (edit) icon and selected the strategy increase debt by decreasing home loan and clicked save and refresh. You can see a number of changes to the investment and loan balances below in comparison to the image above with figures appearing in both the loan instalments and gearing strategy drawdowns sections of the table.
Effectively, in this example we have elected for the client to drawdown additional amounts from their loan and direct this money into the investment fund. You can see the values within the gearing strategy drawdowns (increasing the overall balance of the loan) and subsequently loan instalments (increasing the investment balance). In the first full financial year of 2022/23 an amount of $16,772 was drawn down from the loan and directed to the investment fund.
Over the entire modelling you can see both the loan and managed fund increase in value as the user borrows more and directs this borrowed money into the investment.
Redirecting earnings to reduce Home Loan
If you wish to model a debt recycling strategy where the client increases their tax deductible debt (investment loan) and reduces their non-deductible debt (home loan) you need to include this as part of the strategy by selecting on the debt recycling button
In this scenario we have elected for all income earned in the managed fund to be re-directed to the Home Loan to help paydown this non-deductible debt sooner, while the growth portion remains in the managed fund to help increase it's overall value.
In this example you can see that the graph has now changed, and the overall net gain remains quite low until financial year 2039 and then steadily increases. This is because the income earned in the investment account is directed at paying off the Home Loan until 2039 where it is paid off and the income remains within the managed fund.
Image 1 below shows you the home loan before redirecting earnings to reduce the home loan
The image below shows you the Home Loan after we have modelled the redirect of the income earnings from the investment into the home loan.
As you can see, the Home Loan has now been paid off by 2039 and the additional money can be seen in the table under additional repayments from gearing.
Related Articles
Settings
Introduction The Settings Menu is where you should begin with Cashflow & Capital. It contains the basic information on your client and allows you to make changes to the settings used, determine significant dates for the scenarios that you wish to ...Assets & Loans
Introduction The next two sections of Cashflow & Capital are Assets & Loans. Here you can view, create, modify and remove your clients Assets & Loans. Any information that has been added within the Fact Find section of AOS will populate here if you ...Enhancements to Midwinter default SoA template
With the upcoming release on June 30th 2022 we have made several enhancements to the default Midwinter Statement of Advice template and included a number of new recommendations to help improve your experience when creating advice documents within ...