My mission to free up some equity (avoiding some hassle)

[Finrod]

Hi Somersofters,

As has been noted time and again, this forum has a wealth of knowledge. I've been coming here for a few years now and have learnt an immense amount. Thank you all for your contributions.

Moving to the reason for my post: I've come to the point where my LVR against property has been 'maxed out', and thus am unable to borrow any more. My income can evidently allow me to borrow another $230k odd.

My idea: I have ~300k of shares that I own outright (thus was not included in the bank's LVR calculations). Given these are shares, I can only make out a margin loan against them (so cannot do an LOC). As such I was thinking of
1. Cashing out my 300k of shares
2. Buying a property for ~$300k (which would thus be owned outright) and renting this out and then
3. taking out an LOC of ~80% of the value of the new property (so ~$240k) and re-purchasing as many of the shares as possible that I sold in the first place.

Why?: Because it gives me another couple of hundred k of skin in the game. You all know as well as I do how powerful that can be compounded.

The issue: Doing this is going to result in a bunch of transaction costs on both selling, and repurchasing the shares. I'd also be exposed to capital gains in a couple of spots. Not to mention there is also the risk of shares rallying a lot during the whole period I am undertaking this initiative.

My question: Is there a better way for me to get the current equity I have in my shares to work for me? Is there a type of loan perhaps that will simply 'front'/re-allocate me the money in such a way that i can avoid the issues above, yet still use my share equity to get more skin in the game?

I would love to hear your thoughts.

PS: I think I'm finally getting used to the "new" look and feel of the forum.

 

[Rolf Latham]

Im not a margin lend broker, but I do recall that lenders will allow an equity loan against a currently ungeared portfolio,
ta
rolf

 

[Finrod]

Hi Rolf,

Thanks for your comment.

Would that not however be a margin loan? Problem with margin loans are 1) they have exorbitant interest rates (when compared to home loans) and 2) you cannot lever as highly against shares as you can against property.

 

[Hoffy]

My question: Is there a better way for me to get the current equity I have in my shares to work for me? Is there a type of loan perhaps that will simply 'front'/re-allocate me the money in such a way that i can avoid the issues above, yet still use my share equity to get more skin in the game?

Depending on that actual shares you hold, most Margin Lenders would apply a security ratio of up to 70%, meaning you could "withdraw" 210k cash for use as you see fit. That's 510k of assets securing a 210k loan or an LVR of 41%. Your alternative that you outline would give you 540k of assets securing a loan of 240k at a LVR of 44%, so the leverage effect you speak of is only marginally different.

Certainly the borrowing rate is higher (still deductible of course), but you would avoid CGT on the sale of the shares and the brokerage on a 300k sale and 240k purchase.

 

[Perp]

2) you cannot lever as highly against shares as you can against property.

Have you considered selling the shares and buying CFDs of the same shares instead? This means you end up with effectively 90-99.9% gearing (depending on the broker and how "blue chip" the shares are). Obviously you need to leave a buffer so you wouldn't actually leverage all the way, but you can easily achieve 80%, for example, if you're confident that prices on your overall portfolio won't drop 20%.

Yes, CFD interest rates can be reasonably high, but given that it gives you dramatically increased leverage, it may be worthwhile.

This is a potentially very risky strategy that you should fully explore before implementing. I'm not recommending you do this, but offering this as one answer to your question about how you can achieve higher leverage on your overall portfolio, for your investigation and consideration.

 

[Joe D]

KISS Principle

Why not simply sell 20% of your share portfolio to use as a deposit on an IP? The IP would then have a standalone mortgage for the remaining 80%.

You keep 80% of your shares for the upcoming rally as well as the benefits of the IP.

 

[The Y-man]

1) they have exorbitant interest rates (when compared to home loans)

I wouldn't call 7.05% pa variable "exhorbitant".....

Cheers,

The Y-man

 

[Finrod]

Some fantastic suggestions there guys, thanks for all of them. Really gets the creative juices flowing!

The Y-man:I was only talking comparative to home loans. They would be cheap compared to say: credit card cash advances, of course!

Joe D: that's brilliant (and so simple I didn't see it right in front of my eyes). That sure would help me get around the LVR issue, but I'd still have ~$240k of owned-outright shares sitting there against which something could be done?

Thanks again all. As always, you've been invaluable.

 

[chilliaa]

Im not a margin lend broker, but I do recall that lenders will allow an equity loan against a currently ungeared portfolio,
ta
rolf

be very very very very careful with this strategy.
One of the main benefits of borrowing against residential property is that the bank doesnt mark to market every day against your property holdings.

I strongly advocate giving incredible caution (can i emphasise this enough).

Borrow against property when it makes sense to invest in shares: yes
Borrow against shares to invest in property: no no.

 

[Terryw]

Hi

I think it sounds like a good idea as you have all that equity there - lazy equity.
Sell, but the property, get the LOC and borrow to buy share - maybe add a small margin loan in there too and hold some cash back in the LOC for an emergency.

 

[marg4000]

Don't forget to factor in the CGT payable if you sell the shares.
Marg