Leverage: The Double-Edged Sword in Property vs. Shares Investing (Australia 2025)

Author: Tepuy Solutions | Date: October 24, 2025 | Category: Investment Strategy, Risk Management, Property Investing

Overview

Leverage, often called 'gearing' in Australia, is the practice of using borrowed money to increase the potential return of an investment. It's a fundamental concept in property investing but can also be applied to shares. While leverage can significantly amplify gains, it equally magnifies losses, making it a true double-edged sword ⚔️. This article explores how leverage works differently for property and shares in Australia, the associated risks, and how to model its impact.

What is Leverage and Why Use It?

Leverage involves controlling a large asset with a relatively small amount of your own capital (equity), using borrowed funds for the rest.

Example:

• You buy a $600,000 property with a $120,000 deposit (your equity) and a $480,000 loan.
• Your Loan-to-Value Ratio (LVR) is $480k / $600k = 80%.
• You control a $600,000 asset with only $120,000 of your own money.

If the property value increases by 10% to $660,000:

• Your equity increases to $180,000 ($660k value - $480k loan).
• A 10% asset gain resulted in a 50% gain on your initial $120,000 equity ($60k gain / $120k equity).

This amplification effect is the primary attraction of leverage.

Leverage in Australian Property Investing

Property investment in Australia heavily relies on leverage.

• High LVRs Common: Lenders are often comfortable with LVRs of 80% for investment properties, sometimes even higher (90%+) with Lenders Mortgage Insurance (LMI). This allows investors to control substantial assets with relatively smaller deposits.
• Capital Growth Focus: The strategy often depends on the property's capital growth significantly exceeding the loan interest cost over the long term. Negative gearing tax benefits can help manage cash flow shortfalls in the interim.
• Magnified Returns (and Losses): As the example above showed, leverage boosts percentage returns on equity when prices rise. However, the reverse is also true. If the $600k property fell by 10% to $540k, your $120k equity would shrink to $60k ($540k value - $480k loan), a 50% loss on your equity from just a 10% asset decline.

Leverage in Share Investing (Margin Lending)

Leverage can also be used for shares, typically through a margin loan.

• Lower LVRs Typical: Margin lenders are generally more conservative than property lenders. Maximum LVRs often depend on the specific shares being borrowed against but are frequently capped around 50-70% for diversified portfolios, and lower for individual stocks. Getting an 80% LVR margin loan is less common and riskier than an 80% LVR property loan.
• Margin Calls: This is a critical difference. If the value of your share portfolio falls, your LVR increases. If it exceeds a predetermined threshold (the 'margin call trigger LVR', often around 70-85%), the lender will issue a margin call. You must then either deposit more cash or sell shares (often at a loss) immediately to bring the LVR back below the limit. Failure to meet a margin call can lead to the lender forcibly selling your shares.
• Interest Rates: Margin loan interest rates are often variable and can sometimes be higher than standard home loan rates. Interest may be deductible if the loan is used for income-producing investments.

Key Risks of Leverage

Leverage significantly increases investment risk in several ways:

• Magnified Losses: As demonstrated, a small drop in asset value can wipe out a large portion (or all) of your equity. With very high leverage (e.g., 95% LVR), even a minor price dip can result in negative equity (owing more than the asset is worth).
• Interest Rate Risk: Rising interest rates increase loan repayments, straining cash flow. This is particularly impactful for negatively geared properties where costs already exceed income. Unexpected rate hikes can force investors to sell assets if they can no longer service the debt.
• Cash Flow Risk: Properties can have vacancies or unexpected large expenses (repairs), while dividends on shares can be cut. Leveraged investors need sufficient cash buffers to cover these shortfalls and loan payments.
• Margin Call Risk (Shares): A sudden market downturn can trigger margin calls, forcing share sales at potentially the worst possible time, crystallizing losses and preventing recovery.
• Liquidity Risk (Property): Property is illiquid. If you need to sell quickly to meet financial obligations (e.g., due to job loss or rising rates), you might have to accept a lower price, especially in a slow market. Selling shares is typically much faster.

Leverage: Property vs Shares Side-by-Side

Conclusion: Use Leverage Wisely

Leverage is a powerful tool, but not a guaranteed path to riches. It significantly increases the risk profile of any investment.

• Property leverage offers higher potential magnification but carries substantial cash flow risks and illiquidity. Its suitability often depends on stable income, long time horizons, and expectations of strong capital growth.
• Share leverage (margin lending) offers more flexibility and liquidity but introduces the acute risk of margin calls forcing sales during downturns.

The "right" amount of leverage depends entirely on your risk tolerance, financial situation, investment timeframe, and market outlook. Aggressive leverage can lead to spectacular gains in bull markets but devastating losses in bear markets or if your personal circumstances change.

Model Your Leverage Scenario

Understanding the impact of different LVRs on potential returns and risks is crucial. The Tepuy Solutions Property vs Shares Calculator allows you to model this directly:

• Input your desired Loan Amount and Downpayment to set the initial LVR for your property scenario.
• See how changes in Property Appreciation are magnified in the year-by-year Equity and Net Cash if Sold figures.
• Compare the leveraged property outcome against an unleveraged investment in shares starting with the same initial cash.

By simulating scenarios with varying levels of leverage, you can gain a clearer understanding of the potential rewards and the significant risks involved before committing your capital.