Gearing

(or Leverage)
Increasing your exposure to the change in value of an asset through the use of debt. For example, If you acquire a house worth $500,000 without having to borrow a cent, you have 0% gearing. If the value of that house increases by 10% to $550,000 you have made $50,000 – a 10% return on equity (ROE). If however, you were geared using an 80% LVR, you would have only contributed 20% ($100,000) of the purchase price. If the house increases by the same 10%, your Return on Assets (ROA) would be $50,000, or 10%, but your Return on Equity (ROE) would be $50,000 or 50%. Be warned though, the same works in reverse – a 10% ($50,000) decline in the value of your property means you just lost $50,000 – or half your capital!

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