Financial help needed. What is gearing?

[Snoggledog]

I'm trying to find out what gearing relates to in a personal finance sense. So far I've found a myriad of different definitions for corporate fiance but nothing that really relates to personal finance. Can anyone provide a simple explanation?

[turbobloke]

Snoggledog said:

I'm trying to find out what gearing relates to in a personal finance sense. So far I've found a myriad of different definitions for corporate fiance but nothing that really relates to personal finance. Can anyone provide a simple explanation?

In various FT articles gearing up in terms of personal finance has often been used to describe, basically, borrowing more money - usually to invest. So, that's what I take it to mean. If wrong, a master of the universe will be along shortly to correct it.

[Roger Dodger]

I work on the assumption that if you're 'highly/heavily geared' then you've borrowed loads.

In companies it can be a positive thing - depending. Not too sure about personally....

[sinizter]

Buy BTL property. Wait a few months for property value to increase.

Borrow more based on increased value of property. Buy more property.

Rinse and repeat.

Until the current crisis hit.

That is gearing on a personal level.

Basically, borrowing an amount to make an investment. Then borrow more, based on that investment.

Happy to be corrected if someone can explain it better.

[Snoggledog]

Thanks chaps. So would I be correct in saying that gearing is the ratio of debt to asset expressed as a percentage?

[turbobloke]

Snoggledog said:

Thanks chaps. So would I be correct in saying that gearing is the ratio of debt to asset expressed as a percentage?

IIRC in personal terms it compares all forms of owned equity / capital to the sum of borrowed funds. A measure of financial leverage.

[98elise]

Gearing is using an investment that multipies your gain or loss

For example, buying shares is not geared, spread betting is. Buying a 100k property with cash is not geared, buying a 500k house with a 100k deposit, and the rest mortgaged is geared.

In both the geared senarios you will gain or lose a larger % (against invested capital) than the investment) Take the property senario, if property prices gain 20%. The property bought outright would be up 20k, the mortgaged/lgeared property would be up 100k, or 100%.

[RemainAllHoof]

98elise said:

Buying a 100k property with cash is not geared, buying a 500k house with a 100k deposit, and the rest mortgaged is geared.

In both the geared senarios you will gain or lose a larger % (against invested capital) than the investment) Take the property senario, if property prices gain 20%. The property bought outright would be up 20k, the mortgaged/lgeared property would be up 100k, or 100%.

For the man on the street, this is the best way of explaining gearing.

[98elise]

RemainAllHoof said:

98elise said:

Buying a 100k property with cash is not geared, buying a 500k house with a 100k deposit, and the rest mortgaged is geared.

In both the geared senarios you will gain or lose a larger % (against invested capital) than the investment) Take the property senario, if property prices gain 20%. The property bought outright would be up 20k, the mortgaged/lgeared property would be up 100k, or 100%.

For the man on the street, this is the best way of explaining gearing.

Most forget the downside though, hence the st we are in as a nation. I find it staggering that in the past decade the man in the street could easily hold 1m + of leveraged investments (easy with a few BTL's) yet not understand there is a downside.

Personally i know 2 people in exactly this senario, who were going to retire in 10 years because property would keep going up forever

One of them went through the last crash as well, yet still didn't think it could happen again!

[fido]

Snoggledog said:

Thanks chaps. So would I be correct in saying that gearing is the ratio of debt to asset expressed as a percentage?

I'd say debt to equity - for example LTV(%) / (100 - LTV(%)) if it's a mortgage.

Edited by fido on Sunday 4th September 21:58

[Ozzie Osmond]

Gearing.

Cost of borrowing = "x"

You then need to believe that the borrowed money, when reinvested on some other business or enterprise, will generate a net return greater than "x".

In theory, the more money you borrow the more money you make - provided the return upon reinvestment is greater than "x".

• THE CATCH

Gearing on the way up is also gearing on the way down.

If the return on reinvestment is less than "x" you go bust very, very quickly because the debt burden instantly becomes too much to bear, and the only way out is to borrow more money....

[Snoggledog]

So in a nutshell.... Gearing is using a loan / mortgage or something else that requires repayment to invest in something in the hope that it turns a profit. The gearing ratio would be what's owed against profit. Yes? No?

From that I would guess that negative equity on a house would equate to high gearing.

[singlecoil]

Snoggledog said:

The gearing ratio would be what's owed against profit. Yes? No?

My guess is no. The gearing ratio would be the amount of ready money invested to the amount borrowed and invested. The ratio would exist before the profit/loss was known.

[Snoggledog]

singlecoil said:

My guess is no. The gearing ratio would be the amount of ready money invested to the amount borrowed and invested. The ratio would exist before the profit/loss was known.

Doh!. I think I wrote the wrong thing there. Reading back through what everyone has said, it seems as though what you (and others) say is correct.

[tgr]

Gearing is amplifying the effect of an investment so you get a multiple of the return - or a multiple of the loss. Companies do this through borrowing to invest, or through special financial instruments known as derivatives. Consumers do it through borrowing usually, although spread betting was mentioned, which is a kind of derivative

HTH

[davepoth]

Essentially, if you are talking about "debt gearing" in relation to personal finance you are quite likely to be fked.

HTH.

[Irish]

In most senses personal gearing involves a mortgage. Roll on MFD (mortgage fee day).

As we found out in this crisis "Leverage Kills" - as my mother would say I now cut my cloth to my measure.

[Snoggledog]

davepoth said:

Essentially, if you are talking about "debt gearing" in relation to personal finance you are quite likely to be fked.

HTH.

Yeah. Thankfully though in this case it's an academic question rather than a "Oh fk. What have I done?"

[Irish]

Snoggledog said:

Yeah. Thankfully though in this case it's an academic question rather than a "Oh fk. What have I done?"

Now, if it was gearing in the Eunos.......

......any time you want to sell.....

[Snoggledog]

Irish said:

Now, if it was gearing in the Eunos.......

......any time you want to sell.....

I rather think my life wouldn't be worth living if I was to sell the Eunos. I'm also not too sure that you'd want it back. Some of those paint blemishes have er... spread a little.