Lending to invest in shares?

[Mal P]

Hi everyone,

I've decided to diversify and invest in managed funds (for the long term) after discussing it with my (fee for service) financial advisor. I wish to borrow to invest, and he reccommends the best way of doing that is to draw down on the equity on my sole IP upto 80% LVR, which will release about $30k. I will then put in about $20k of my own cash to start with and thus have an initial investment amount of $50k or so. He reccommends this because it avoids the higher interest rates and margin call problems associated with margin lending, which certainly makes sense.

Do you think I should go beyond the 80% LVR and hit LMI in order to have a larger starting amount? Would this negate some of the benefits in going with my existing lender as opposed to a margin loan regarding cost etc?

Or is there a completely better way of lending to invest in managed funds?

Thank you,
Mal

 

[The Y-man]

I'd personally err towards keeping it conservative to start with - i.e. stay at that 80% level. When you are a bit more seasoned with the funds you are going for, you might want to increase the portfolio and leveraging.

Cheers,

The Y-man

 

[House_Keeper]

I wouldn't go over 80%. LMI would makes the effective interest cost higher than with a margin lending account.

You could use the equity on the LOC, but then it ties the equity up. You've got no equity reserve left.

It might be worth considering using a margin lend with a conservative LVR (say 40% or 50% to start with). At such LVR, it would take a huge market drop before you would get a margin call.

At the end, it depends on what you are comfortable with.

Whatever you do, start small and get to understand how things work first.

Cheers,

 

[RichardC]

Keep it simple. You incur borrowing costs when drawing down on your IP. There are no borowing costs with margin loans and while your stock holding is marked to market daily and margin calls are possible, the flip side is that 60-75% of your profit is listed every day as "available funds". If you can better 8%pa you never need to pay the accrued interest. You can put your savings into the a/c and reduce interest and then when your favourite stock dips you can buy four times more than your "available funds" at the time. It's horses for courses and margin loans are the best for the stock market. It may be worth noting that margin loans are not retail loans so the lender is not bound by the consumer protection codes your fiendly bank is. Ergo, there are no servicibility tests.

If you do well and your "available funds" climb you can withdraw (I think, technically, only for commercial purposes) with no questions asked and you have the deposit on your next IP. Again, there are no borrowing costs. I use, without comment, http://www.leveraged.com.au/ and it is worthwhile reading a little on the site.

As an example, I transferred some of my stock holdings into my margin account last Jan. and used that equity to buy $17k of BHP and $31k OXR. These now show $16k gain and the original stock I transferred in has gained and there was always unused equity or "buffer" so I could now withdraw a useful deposit for another IP. I could have that money in my bank a/c overnight.

Read the reply I gave to Koko earlier today. Why not run that past your advisor?

Bill

 

[Mal P]

Thanks guys. Indeed, my existing loan doesn't permit an off-set facility (nor would extending it) so in the end, I may well be paying more in interest with a home loan after all.

Richard, may I ask what you meant about never having to pay the accrued interest? You mean, if I do better than 8% p.a. I can sell down the stock combined with dividends to pay the interest or... ?

Thank you,
Mal

 

[RichardC]

Richard, may I ask what you meant about never having to pay the accrued interest? You mean, if I do better than 8% p.a. I can sell down the stock combined with dividends to pay the interest or... ?

Thank you,
Mal

Closing price of your portfolio is entered each day. An 8% gain on 100% of the portfolio will more than offset the 8.5% payable on 60-75% which is owing. While the loan amount stays below the margin value of your shares you don't have to actually pay the month's interest. You can deposit and withdraw as a right.

There is an on-going discussion here about Living off Equity. Let's assume that, over time, one were to build up a healthy portfolio with a low LVR, the dividends from which didn't quite meet your lifestyle needs but the good steady cap gains could (this is the basic assumption of the LOE schemes), then there would be no hassle and no need for any special arrangements. You just draw down on your available equity when required for the trip or new car etc. If you are living within your means the debt will not increase as fast your portfolio value.

I think this does the same as the Navra schemes and is far more easily understood and therefore easier to adjust your expenditure to your income.

You may have gathered by now, that I am a fan of margin loans so do your own research.

Thommo

 

[Grego]

Closing price of your portfolio is entered each day. An 8% gain on 100% of the portfolio will more than offset the 8.5% payable on 60-75% which is owing. While the loan amount stays below the margin value of your shares you don't have to actually pay the month's interest. You can deposit and withdraw as a right.

So the interest is capitalised ??
Is this the case with most margin lenders?

Thanks
Greg

 

[RichardC]

"So the interest is capitalised ??"
If what I described is "capitalising interest" then yes.

"Is this the case with most margin lenders?"
It is with Leveraged which I use.

 

[Grego]

"So the interest is capitalised ??"
If what I described is "capitalising interest" then yes.

Only problem is a tax time as the capitalised part is not tax deductible as far as I know, so it requires a detailed record of the account. Although not saying this is a bad thing when you are making money

 

[A95]

"So the interest is capitalised ??"
If what I described is "capitalising interest" then yes.

Only problem is a tax time as the capitalised part is not tax deductible as far as I know, so it requires a detailed record of the account. Although not saying this is a bad thing when you are making money

Hi Grego,

Can you provide a source of the info that ...the capitalised part is not tax deductible...

Thanks

 

[Simon]

I use LE and have geared to a fraction over 50% for my share portfolio.

As your shares appreciate so does the LVR fall.

From what I understand it is OK to capitalise interest for shares and claim the interest annually.

This has been discussed a number of times.

Perhaps you can do both?

Draw the $30K and use it to start a LE account (or ay other margin lender). Draw down $60K and purchase your funds. This will be at a conservative 50% LVR.

No LMI either.

As you invest more funds draw the same amount again. ie if you save $5000 then deposit it into the account and buy $10K worth of equities.

Makes sense?

Cheers,

 

[RichardC]

Only problem is a tax time as the capitalised part is not tax deductible as far as I know, so it requires a detailed record of the account. Although not saying this is a bad thing when you are making money

I am neither a tax advisor nor financial advisor. Do your own research.

 

[saucy gibbon]

I'm not a tax accountant however I believe that the capitalised interest is tax deductible, its the interest incurred on the capitalised interest that is not tax deductible. I expect that this is because while the capitalised interest is the result of an income producing activity, the interest capitalised is in itself not an income producing activity and therefore the interest incurred on it is not deductible.

 

[Simon]

My research indicates that the same rules do not apply for share borrowing as they do for property borrowing.

I have been iformed by my accountant that capitalising interest is OK for shares but not for property.

I cannot explain why.

 

[Grego]

I'm not a tax accountant however I believe that the capitalised interest is tax deductible, its the interest incurred on the capitalised interest that is not tax deductible.

Yes Sorry that's what i was trying to say it just didn't come out right.

I'm only going on what my accountatnt told me & you would hope she knows what shes talking about.

I have been iformed by my accountant that capitalising interest is OK for shares but not for property.

Simon maybe next time you are talking to your accountant you could ask why and let us all know. I might start a seperate thread to see if any one here knows for sure.

I'll be seeing my accountant in 2 weeks so will be sure to ask.

Cheers
Greg

 

[saucy gibbon]

Simon,

When you capitalise an expense it becomes part of the cost base. The difference between shares and property and the treatment of the capitalised interest may be due to the time frame of the investment ie property is ususally purchased with a timeframe of more than 12 months whereas with shares it is not unlikely for them to be sold within 12 months. Of course this varies and one would need to demonstrate the intent when making the investment to have any hope of having the ATO change its treatment of the individuals circumstances. How you would demonstrate intent I'm not sure.

 

[MJK]

My research indicates that the same rules do not apply for share borrowing as they do for property borrowing.

I have been iformed by my accountant that capitalising interest is OK for shares but not for property.

I cannot explain why.

This is the understanding that my accountant gives me also. It may not be fair for the pure property investors but its great for those who have margin loaned shares/funds. it supports the argument that "man cannot live on property alone"

MJK

 

[Andrew]

I think the confusion about deductability of capitalised interest stems from a recent
court case (ATO vs Hart IIRC.) I'm not a lawyer so I won't even attempt to interpret
what the outcome was but the case was about a scheme where an investment loan
and a PPOR loan were linked so that the interest was concentrated into the investment
portion of the loan thereby increasing the deductions claimed.

The scheme was struck down by the courts I believe.

There are some solicitors on this board who may like elaborate.

andy

 

[Mal P]

Thanks everyone, this looks like an interesting concept. I'll run it by my financial advisor but I don't think I'm quite getting it...

Simon, as you say, I'll draw down my mortgage by $30k. Then I'll add my own cash to it (say $20k) to give me cash of around $50k. I'll then place that cash in a margin lending account, and borrow an extra $50k from the margin lending account to buy in total $100k worth of managed funds.

Now, I have to pay the interest on the mortgage that I drew down, but that should be tax deductible. But I'm not quite getting how a capital gain on the managed funds that is greater than the interest on the margin loan will mean I don't have to pay any interest... surely no one would lend me $50k for nothing?

Or do you mean that because a capital gain of 8% or higher means the margin remains the same or lower, that is, the LVR remains less than 50%, the interest would merely be added to the 'loaned' amount (instead of myself having to fork out the cash on the spot) and so 'effectively' I'm not paying interest? But that would mean that the capital gain would simply be eroded by the interest is that right?

Thanks again (and thoroughly bedazzled - Google ain't helping on this one),
Mal

I use LE and have geared to a fraction over 50% for my share portfolio.

As your shares appreciate so does the LVR fall.

From what I understand it is OK to capitalise interest for shares and claim the interest annually.

This has been discussed a number of times.

Perhaps you can do both?

Draw the $30K and use it to start a LE account (or ay other margin lender). Draw down $60K and purchase your funds. This will be at a conservative 50% LVR.

No LMI either.

As you invest more funds draw the same amount again. ie if you save $5000 then deposit it into the account and buy $10K worth of equities.

Makes sense?

Cheers,

 

[MJK]

Mal P,

You are getting it.

Your capital gain will not be totally eroded if the annual gain is above the annual interest. Here inlies the risk if it under performs.

MJK