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Discussion in 'Investing Strategies' started by Alex, 13th Aug, 2007.

  1. Alex

    Alex Member

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    Hi all I am new to this site and am quite impressed with the knowledge base that exists in this forum. I therefore am after some opinions on what are some creative and sensible ways of structuring and growing a diversified investment portfolio. My current situation is:

    PPOR Value = $385,000
    PPOR Loan outstanding = $296,000 :mad:
    Offset Account PPOR loan = $32,000 (Cash) :)
    Mixed Share Portfolio (Bluechips) = $9,300 :)
    No other debts (at the moment)

    What would be a good strategy to improve capital growth and income producing assets with good debt, whilst reducing the bad debt :mad: associated with the outstanding PPOR loan of $296,000?

    I am interesed in the possibility of opening up another (third) investment only account (IO to keep tax simpler) to service a margin loan for managed funds/shares or an IP. What would be the best way of structuring my existing situation to maximise my bad debt reduction while getting amongst some strong growth investments?

    How would others juggle their finances in such a situation?? what would be an efficient strategy that doesn't affect general repayments by too much (+$200p/w).

    Thanks in advance
     
  2. Alex

    Alex Member

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    Any comments would be appreciated <Bump>

    Does anyone have any comments, thoughts or opinions <Bump>
     
  3. Simon

    Simon Well-Known Member

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    If you choose the Margin Lending path then I suggest you consider the following:

    Transfer your offset money into your loan.

    Start a LOC or split to 80% of the current value of the home - higher if you are happy to wear LMI :(

    This will give you a loan with a max limit of $44K - higher if the valuation allows.

    Start a margin account using your current shares. Transfer the $44K to it when you are set to buy.

    You now have security of approx $50K to buy with. I gear to a 50% LVR in my margin account to allow for some volatility - this might be a good thing in the current market climate.

    If you did the same you could now buy $100K of stocks and managed funds.

    Arrange for all dividends and distributions to go into your offset account or home loan account. Combined with the CG on the home you will reach a point where you can raise the LOC/split (investment) to add to the margin loan. combining this with CG in your share portfolio means there will be a time when you need to buy more shares to keep your LVR at 50%,

    This should mean that your home loan (nondeductible) should be decreasing whilst your LOC and margin loan (deductible) are growing. History suggests that the underlying equities are also growing :) but this is a long term approach and some years may not result in much growth or can even be negative :( .

    Does this help?
     
  4. Alex

    Alex Member

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    Thanks Simon

    Thanks for that response Simon :) . This strategy may take me a while to digest and comprehend. I am new to this and will have to get a good grounding of the fundamental workings of LOC's (Line Of Credit), LMI :)confused: ??) and other acronymns. I have a rudimentary knowledge of financial fundamentals though am very willing to learn all I can. I want to be as dilligent as possible to make the best decisions I can to optimise my wealth growth within my means and circumstance.

    I guess my best bet is to obtain further clarification would be to create a spreadsheet or table to get my head around this type of strategy.
     
  5. bundy1964

    bundy1964 Well-Known Member

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    LMI = lenders mortgage insurance. Protection for the bank if you default on payments.

    I would also capitalise the interest on the ML so you can get the highest debt recyling that you can.
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Further to what bundy wrote ... if you are new to LMI you do need to understand that this insurance does NOT cover you, it covers the bank.

    Also, most real estate loans are structured with LMI, but you don't normally see it unless you borrow more than 80% of the value of the property, in which case the bank will generally make you pay the LMI up front - the higher above 80% LVR you go, the more the insurance costs with 95%+ generally being very expensive (too expensive in my view - not worth it).
     
  7. Alex

    Alex Member

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    Re-valuing a PPOR

    Let me try and see if I get the gist of this strategy:

    I would reduce the PPOR loan amount with the money sitting in the loan offset account ie. $296,000 (PPOR loan) - $32,000 (offset) = $264,000

    PPOR Current Value = $385,000 so the difference between loan and current value would be = $121,000 (Equity).

    I then open a Line of Credit on the loan

    If 80% of the value of the home is 0.8 x $385,000 = $308,000 (80% LVR)
    then $308,000 - $264,000 = $44,000 which would then be available to invest whilst leaving the 80% LVR to keep the bank happy and to avoid Lenders mortgage insurance.

    I then start a margin loan account using my existing shares ($9,300) by adding the $44,000 accessed from the home loan raising the investment value to approx $50k. By borrowing another $50k (interest tax deductible) i have $100k working for me with the earnings accruing in my offset account. As the $100k hopefully grows with CG within the managed funds and shares and thus reduces the LVR < %50. It is at this point that I have a few questions:

    1. What is the best way of balancing the 80% PPOR loan and the 50% LVR for the margin loan? How often should you re-value a property to utilise CG?

    2. Say I use the following scenario as an example. If my LVR on the margin loan was to get to 45%, by the margin loan investment increasing in capital value to $110,000 in the next 12 months. I would then have $110,000 in capital & a $50,000 loan (IO) = 45% LVR. Would i simply increase the loan by $5000 and reinvest this money to even up the LVR to 50%? or should I be doing something else?

    3. Should I then be using my own cash savings and any income distributed by the margin investment into my offset account to pay off my PPOR mortgage or am I missing something?

    Thanks in advance
     
  8. Simon

    Simon Well-Known Member

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    A LOC is simpler than a credit card. You have a limit and you pay interest on the outstanding balance. Nothing more to it than that.
     
  9. Alex

    Alex Member

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    How do you go about capitalising on the ML interest? :confused:
     
  10. Simon

    Simon Well-Known Member

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    You seem to have grasped it perfectly.

    there is no hard and fast rule about when you balance the portfolio back to 50%. In fact if you cannot identify something you wish to buy then it would be prudent to wait until you can.

    Annually, weekly, it depends on how fast the values of your home and shares are rising!

    The best way to rebalance the home loan is to wait until there is a sizeable enough amount to add to your share portfolio then ask your lender to topup your LOC to 80% LVR. Less if you are closer to retirement perhaps. There is no rule that says 80% is right - it just happens to be the cutoff before expensive LMI is levied.

    Common sense dictates that you should be paying down your PPOR before any deductible debt. One idea would be to dump everything into the offset - fortnightly pay, rent, dividends etc etc. Then when you wish you can transfer some to the loan and topup the LOC. You may choose to keep some slush funds in the offset for personal use - perhaps that trip to Monaco your wife has been dreaming about.

    This is your plan. Might be a strategy we discuss a lot here but you need to change the numbers to make it yours. 80%, 50% are all flexible depending upon your goals and the market at any one time.

    Cheers,
     
  11. Simon

    Simon Well-Known Member

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    It just happens if you don't make payments into the account. Like a LOC.

    As long as the loan total stays under the limit set by the security (shares) then noone will ask for money.
     
  12. Alex

    Alex Member

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    There are some great responses thanks to you all...It is starting to click in my mind when I think it through step by step with some great explanations.

    I have another question regarding Margin Loans (ML). What are the current typical interest rates and service requirements (ie. fees, repayments) for such a loan? Say for my above scenario of $100k investment = $50k (ML) + $50k (Existing Shares + cash)

    I would like to know what additional weekly payments I would need to provide out of my current cash flow to service such an investment.
     
  13. Simon

    Simon Well-Known Member

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    Mine is 8.8% but I suspect yours will be higher as it is a smaller loan. No fees. I haven't made a repayment yet this FY.

    I reckon you'd be on about 9.4%.

    Bit more than your home loan which is why you should keep that one at the highest LVR and the margin at 50%, also to reduce the chance of a margin call.
     
  14. bundy1964

    bundy1964 Well-Known Member

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    Current rates are 9.15% subject to change for up to 250K, it does vary between lenders a bit - higher rates usualy give better LVR and higher margin call buffer. Free set up unless you use a trust ( $150 typicaly ) and no need to spend a cent of your income provided you stay within LVR.
     
  15. Alex

    Alex Member

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    Can anyone please explain how and when a margin call occurs?
     
  16. Simon

    Simon Well-Known Member

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    As I typed my last post I had a feeling I shoulda explained this one.

    If the security of the loan (the underlying shares) drops in value so that the LVR is above an acceptable level (70%) is typical the margin lender will call and ask you to top up the loan to bring the LVR down again. You could also provide additional security such as shares you hold that you didn't offer them earlier or even shares owned by someone else eg a spouse. If they cannot get you then they sell some of the shares to bring it into line.

    Having shares sold is not often the best option as it usually means selling when the market is low.

    This is why you will see many of us advocating an LVR around 50%.

    Cheers,
     
  17. Alex

    Alex Member

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    So I guess the dividends and other returns would have to surpass the interest rate for it to be a positively geared investment. So you would hope for a greater than 9.15% return (discounting CG) for the investment to produce any income stream. I guess the average income yield for a ML on a sound share/managed fund investement, would generally surpass a Investment Property (IP) that yields only rent + a minimal capital gain (in the current real estate market accessible to me).

    Let me know if I am wrong but I guess the downfall with the ML strategy, compared to obtaining a IP, is higher risk for being exposed to an inherently more volatile share market (in the short-term anyway). It would still be a beneficial strategy for long term capital growth and an ever increasing income stream.

    As I am only 30 years old I am keen to get into the most growth effective strategy I can, and I guess I can wear a riskier profile if the long term returns are potentially greater as well.
     
  18. Alex

    Alex Member

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    I guess that 20% difference in LVR provides a buffer to guard against a volatile market. Does that 20% equate directly to a 20% reduction in the value of the investment holding before a margin call occurs?
     
  19. Alex

    Alex Member

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    On second thoughts.. as i am only borrowing 50% of the funds for the investment, the effective positive position should be 9.15% / 2 = 4.58%... Is this correct??:confused:
     
  20. Simon

    Simon Well-Known Member

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    Don't forget the LOC too. That will be about 8.xx%