Margin Loan affect on Servicability/LVR

Hi Everyone,

Not sure if this question has been asked before.


Any thoughts??

Bump

** bumpity bump**

Where are all the brokers??

Yea Muz
l am keen to learn the answer as well.
Must be all at a long Friday lunch!!
cheers yadreamin

Hiya Muz

Generally the margin will be assessed at limit by most lenders as PI over 25 years.

If you have a trust with a corp trustee, try and get the loan and shares in the name of the corporate trustee, WITHOUT a directors guarantee.

ta

rolf

Rolf Latham said:

Hiya Muz

Generally the margin will be assessed at limit by most lenders as PI over 25 years.

If you have a trust with a corp trustee, try and get the loan and shares in the name of the corporate trustee, WITHOUT a directors guarantee.

ta

rolf

Click to expand...

Rolf,

Does this mean that even if I open a margin lending account but don't draw on the amount (i.e. lodge $30K of shares with st george margin lending) my servicability criteria will still be effected?

Asking just out of interest, I actually have a margin loan which I drew down on the partially fund the deposit for my first property purchase. I didn't disclose this to the bank and got away with it. But it could be because I was buying a property well below what I could borrow.

Cheers

Tim

Unfortunately yes.

It is much the same with a LOC. By default all banks treat it as fully drawn.

Not very helpful when margin loans are treated as fully drawn (even if they are not).

My last Credit check (after setting up margin loan facilities) under commercial credit information stated "Commonwealth Securities NSW enquired about you on xxxx in reference to a Lending Proposal account for the amount of 500,000"

This margin account had been set up on the basis I theoretically would have access to about 167k in funds (from a Line of Credit) and Commsec would allow me to margin that up (i.e. with shares of max 75% LVR to a $500k lend).

It is not logical for banks in calculating serviceability to treat margin loan facilities as P & I loans fully drawn. You can't simply compare servicability on margin loans with shares as security with home loans and lines of credit secured by property.

Why?

(1) Where the LVR moves above 75% the loan is subject to (partial) margin call and the required number of shares will be sold by the margin lender to bring the loan back to 75% LVR (shares security is far more divisible than than property security. Also shares can be sold almost instantaneously and sale proceeds can be received in T+3 versus property which could take many weeks to sell then more weeks to receive funds (T+ 5 weeks etc)

(2) Some margin lenders have unlimited facilities-such as Leverage Equitiies. As long as you can put up 25% of the funds Leveraged Equities will lend up to 75% LVR. A logical extension of the banks serviceability models would be to treat all LE margin loans as fully drawn P&I loans for an infinite amount. In my experience, banks don't treat Leveraged Equities margin loans in the same manner as other margin lenders who have applied a fixed credit limit.

(3) Even if fully drawn the shares usually come with dividend income which should be included in serviceability calculations

(4) Margin loan facilities are seldom fully drawn and at times not drawn at all


Lenders need to move out of the dark ages and rethink how they can better calculate serviceability for clients with margin facilities.


Ajax

I had to go thru it with CBA a few months ago now and had the same concern & issue get raised... if it is a cba/colonial loan then they dont allocate a commitment to it as its repayable by call on the shares.

However, if you are looking at using the dividend interest from the margin loan to service the debt (which is what I was doing) then they basically subtracted the limit from the value of the shares to find a rough 'net asset' on share value and somehow pro-rata'd the payment.

I told them I'd reduce my limit and it gave me more dividend that I could use to service as my actual debt is 50% of the limit, it was just my planner wanted to set something up for future use (or his brokerage perhaps). So for paper, I dropped it and then all i have to do in the future if I want more is to send them a fax and they'll pop it back up.

Hope that makes sense.

Thanks Everyone

Thanks everyone for the replies. Am learning all the time.

OK I understand about the LOC. Banks will treat as fully drawn even if it is not in use.

I think Rolf L was saying if shares/managed investment was bought by a trust then there would be no affect on personal servicability. (My understanding would be to loan the LOC amount to the trust (HDT) at commercial rates, have the trust buy the shares/managed investment and then have the trust apply for the margin loan) Could someone confirm this please.

But I'm still a bit sketchy if we use a personal LOC and margin loan will the bank take into account dividends as income??

Muz,

my line of credit was in my own name and the CBA margin facility was in a company name. The monies had been lent by me to the pty ltd compamy at commercial rates. Commsec had required a directors guarantees on the margin facility at the time the margin loan was established.

The result was that my company's margin loan was considered a contingent liability by me personally and therefore was considered in my serviceability calculations.

BTW there are not many brokers who handle serviceability and margin facility issues well.

Ajax

Fortune favours the brave.... but

History remembers the foolhardy poorly.

You wish to increase borrowings (zero cap i/p) to buy shares where your contribution is only 40%. That sounds like a lot of leverage to me. (I've done it myself, but only later saw the risk I took)

Then consider that the company you invest in probably has nett tangable assetts (NTA) of 30 - 60% of it's share price, and millions of borrowings. An interest rate hike would tell against both the share and your property. Feeling lucky?

ps You would have a margin call long before the share drops 30%. Trust me, I have had three mongrel resource shares do just that lately so it can happen.

Hi Richard C,

a more radical version of the above is to draw funds from a line of credit (up to 80% LVR) then buy contracts for difference ("CFD's"). With CMC you only need to contribute 3% of the share value on leading stocks (i.e. a 97% LVR is achievable). Also few credit checks are done.

Withdraw $100k on a line of credit and leverage this with CFD's to $3.3m equity exposure (not that I am prepared to do this).


Ajax

welll ajax that removes one of my 2 reasons for not trading/investing in the stockmarket. 1 = lack of leverage 2 = I know nothing about trading the stockmarket

Hi knightm,

CMC 97% LVR Contracts for Difference-like giving a 3 year old matches and a container of petrol.


Ajax

at least I know I am that 3 yr old, so I'm not gunna play with the fire...for now

Muz said:

Hi Everyone,

Not sure if this question has been asked before.

Just starting to research shares/margin loans etc and am wondering if I borrow money via a LOC and then margin loan to purchase shares/navrainvest whether this would have any affect on my servicability or lvr to buy more rental properties?​

Any thoughts??

Click to expand...

Muz,

I had thoughts in this thread about improving servicability. Early last year, some lenders didn't appear to be interested in the servicing costs of a margin loan, but did take the dividends into account. This may have been because the margin interest was capitalised.

KJ

Thanks KJ

keithj said:

Muz,

I had thoughts in this thread about improving servicability. Early last year, some lenders didn't appear to be interested in the servicing costs of a margin loan, but did take the dividends into account. This may have been because the margin interest was capitalised.

KJ

Click to expand...

Thanks KJ