Equity protected loans

[agent007]

Was wondering what opinion/experience you have of the capital protected loans some Banks offer for purchasing share portfolios?. The idea sounds good but, interest rates are so high that I don't see how they can be worst it?. I have run some very basic calculations and in the best case scenario one breaks even...



Cheers,
James.

 

[DaleGG]

Hi James

I am aware of them, and, like you thought that the high interest rates made them unworkable in most instances.

I love the concept, just don't like the way they are put together.

Pity!

Dale

Originally posted by agent007
Was wondering what opinion/experience you have of the capital protected loans some Banks offer for purchasing share portfolios?. The idea sounds good but, interest rates are so high that I don't see how they can be worst it?. I have run some very basic calculations and in the best case scenario one breaks even...



Cheers,
James.

 

[Corsa]

Hi James

I have a capital protected share portfolio with Macquarie Bank. Effectively the structure of the deal is that you loan 100% of the funds to invest in a blue chip portfolio. You provide no initial cash input and the bank protects the underlying value of the investment by guaranteeing the intial value of the shares.

The upside is you get to have (or share) all the gains during the term of the investment as well as all dividends. The downside is high interest rate as well inflexibility to change the investment structure during the term. Only 80% of the interest is deductible for Taxation purposes as the remainding part of the interest rate is attributed to the protection costs associated with the deal.

When I purchased this investment Macquarie preselected four share portfolios consisting of 12 securities. I then researched each security and did some financial analysis on Dividend yield, Capital growth potential and EPS analysis. After this time I went through each share with a Macquarie analyst to narrow the field down to four. At the time I invested the market was low and the investors were off shares.

I purchased mine in January 2003 and so far it has turned out like this:

Shares: 50,000
Loan -50,000
Term: 3 years
Interest Rate: 14.75%
Interest paid: $4,323
Capital Growth: $5,500
Share Value: $55,000
Dividends: $2325
Tax Deductions: 80% of $4323 = $3,546
Tax Benefit = 3546 * (1 - 0.47) = $1,879
Return:$5,500 + $2325 + $1,879 = $9,704
Cost: $4,323
ROI: 224%
Yield: 4.65%

My thoughts are on this investment is:
1. only invest in this if you have a high income to fully utilise the tax deductions

2. have high excess cashflow per month, you dont want the cost of this investment to encroach on other investment cashflow or reduce your serviceability to the banks

3. have low equity or dont want to use existing equity. If you have equity you may be better off getting a normal margin loan and purchasing shares that you are interested in, you could even protect them yourself using Put options etc.

4. if you have a set and forget approach to shares then this is a way to get into shares without putting much time into it

5. make sure you have some property though as I personally have experienced significantly larger returns on my property deals compared to this deal.

Hope this helps

Corsa

Originally posted by agent007
Was wondering what opinion/experience you have of the capital protected loans some Banks offer for purchasing share portfolios?. The idea sounds good but, interest rates are so high that I don't see how they can be worst it?. I have run some very basic calculations and in the best case scenario one breaks even...



Cheers,
James.

 

[abcdiamond]

Corsa

I see you have taken account of the tax relief on the interest, but have you allowed for the future tax on the Income/ Capital Gain ?

I have not considered this form of investment before, but from the info you have given it does seem a reasonably safe way into the share market, albeit at a high interest cost, as you say.

Regards

ABCD

 

[Corsa]

Originally posted by abcdiamond
Corsa

I see you have taken account of the tax relief on the interest, but have you allowed for the future tax on the Income/ Capital Gain ?

No I havent taken future capital gains tax into account as I see this as immeasurable at this point. I have taken tax relief into account for the holding cost and dividend income for the portfolio over the 3 years as this is critical in seeing how this type of investment can work from a cashflow and viability point of view.

I have not considered this form of investment before, but from the info you have given it does seem a reasonably safe way into the share market, albeit at a high interest cost, as you say.

ABCD [/QUOTE]

For me it has been an ok investment. I had equity but preferred to use that for purchasing additional properties... but I also wanted to access to the share market so I had to trade-off using more flexible options (ie a normal margin loan) with the use of this product.

 

[Aceyducey]

Excellent posts Corsa!

This is an area I'll have to explore more

Cheers,

Aceyducey

 

[Corsa]

Thanks Aceyducey!

Let me know if you have any questions once you had done your research, more than happy to help,

Cheers

Corsa

 

[agent007]

Thank you all for your posts. Specially Corsa that seems to know a lot about this.

Since I have some equity, I think that doing marginal lending and protecting the portfolio with a put may be the way to go... I still have to check interest rates for marginal lending as well as the cost of the put to protect the portfolio.

Thanks again,

James.

 

[Corsa]

Originally posted by agent007
Since I have some equity, I think that doing marginal lending and protecting the portfolio with a put may be the way to go... I still have to check interest rates for marginal lending as well as the cost of the put to protect the portfolio.

Current Macquarie Interest Rates for a normal margin loan is 7.65%. It depends on what securities you pick how much the protection will cost and whether you will actually need it as well.

For example if you obtain a margin loan of $100,000 and invest in NAB shares then you will need to provide $25,000 to NAB in equity as the LVR on NAB shares is 75%. This means you can buy 3201 shares @ $30.92 and will pay around 1% in brokerage or $1000. Then you can obtain a put option to purchase the same shares in 3 years time at $31.00 which will cost you around $2 per share. Total cost to you will be around $6,000 for the protection for 3 years. Total interest cost for the same period of time will be around $7,650. This equates to an effective interest rate of 13.65%.

This means that if the share price goes up then your option to buy at $31 will be worthless and you have effectively paid $6,000 insurance. If the share price goes down then you will be able to sell your shares at $31 and therefore will not have lost any money other than the cost of the protection. This is a basic example but this gives you an idea of how the scenario works.

At the following link you can find a list of the LVR's by security.

Hope this helps

Corsa

 

[agent007]

Originally posted by Corsa



At the following link you can find a list of the LVR's by security.

Hope this helps

Corsa

Where is the link?

Thanks,

James.

 

[Corsa]

http://personal.macquarie.com.au/personal/products/loans/investment_loans/margin_lend/margin_lend_detail.htm

 

[Corsa]

Hi All

The question of Macquarie GEI products has been raised in the recent posted started by Acey on "Is anyone going to Peter Spann's even this weekend"

Please note that I invested in a Macquarie GEI product 2 years ago now and paid $6000 penalty interest to get out of it at the start of this year 2 years ahead of the 3 year term I signed up for. Refer to the analysis described in this thread earlier. The reason being, this product was not performing as well as other asset classes. These are great products but you generally have to commit for a 3-5 year term and they are expensive on a monthly by monthly basis compared to when you actually get the dividends so you do need to have cashflow available to support it.

If you know anything about the way Calls and Puts work, you could get this protection yourself on the underlying share.

Anyway, food for thought.

Cheers

Corsa

 

[Glebe]

Corsa,

Thanks very much for your posts. I think you're a great contributor.

Glebe.

 

[DavidPleydell]

Yes I have done all of Peter Spanns seminars over the years.

The other thing missing is that while only 80% of the loan is deductable, the put (hedge) protection is also claimable against your CGT so that will also improve your outcome.

The other thing is that you should be writing covered calls against it so you can generate income to cover your interest. So really the maximum loss to the person is the loan interest and if you write calls you could possibly (depends on the premiums) worst case break even by doing that if the shares never go up.

David

 

[geoffw]

The other thing is that you should be writing covered calls against it so you can generate income to cover your interest.

Peter suggests that you have to be really comfortable with the trading out strategies in order to write covered calls in these circumstances- probably at least two years experience.

The link posted earlier in the thread does not seem to work- try this - some points on CGT and tax were mentioned- thanks for the confirmation.

 

[DavidPleydell]

Hi geoffw,

Yes Peter does indicate you need to practice at writing calls and understanding the option defensive strategies before doing it on a major scale. He teaches such things in his courses.

I have never used the protected loan, but for the original poster comments on how to make money on this product, I couldn't see without the covered calls how it would stack up well coz without the premium you are only relying on the stocks going up to make money. Hence you need to be good a picking stocks. However If you can write calls as well you certainly can make the product look a lot more attractive. That is just my opinion after looking into the product.

Of course people need to look into all aspects of it thoroughly and whether it suits them before trying it.

David

 

[geoffw]

I couldn't see without the covered calls how it would stack up well coz without the premium you are only relying on the stocks going up to make money.

I'm not quite sure which would take the most skill- writing the covered calls and using all the defensive strategies, or picking the stock.

Maybe it's just a $14K gamble for many- the downside is not zero, but it is much less than $14K.

 

[DavidPleydell]

Well actually if you are really justed interested in generating an income stream then the stock selection isn't as important. Just pick high yielding stocks.

Oh I also forgot to mention that the dividends and tax credits have to be taken into account, if they are high and you can get very good premium then the reliance on great stock picking is lessoned. Hence why doing both makes it look a lot better.

I think a good options broker would help here. ie defensive strategies and writing the calls.

David

 

[Aceyducey]

Peter's recommendation was 70% financial sector & 30% resources.

Picking shares with good dividend returns.

Freeman Fox has 30 shares they recommend. I'd expect that that contains the basket they would suggest people would use in this type of portfolio....

Or the set that Navra Invest uses could be substituted

Cheers,

Aceyducey

 

[qaz]

Peter's recommendation was 70% financial sector & 30% resources.

Picking shares with good dividend returns.

Freeman Fox has 30 shares they recommend. I'd expect that that contains the basket they would suggest people would use in this type of portfolio....

Or the set that Navra Invest uses could be substituted

Cheers,

Aceyducey

What were the shares they recommended?. Im also quite interested in this product.