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Capitalising Interest

Discussion in 'Finance & Banking' started by Mark Laszczuk, 7th Sep, 2005.

  1. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Hi everyone,

    In regards to capitalising interest, is it possible to do this indefinitely? As in, does the interest need to be repaid yearly or can it just be capitalised for the life of the loan (however long that may be)?

    Mark
     
  2. Mark

    Mark Member

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    Hi Mark

    I assume you are referring to a margin loan in which case it is treated as a LOC and as long as the loan to value ration (LVR) is within limits, as set by the lender, the interest can be capitalised at 'infinitum'. Remember lenders want you to grow your debt as long as you can service it.

    Mark
     
  3. Alan

    Alan Well-Known Member

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    So what individual investor scenarios should be present to make capitalising interest on a Margin Loan the preferable structure option? ie. under what circumstances is this a smarter thing to do rather than simply pay the interest when it falls due?




    :)
     
  4. Medine

    Medine Active Member

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    Hi Mark,

    Some mortgages will let you capitalise interest. Usually these are Lines Of Credit (LOC).

    With a mortgage you can only capitalis interest until you meet your credit limit, regardless of the current LVR.

    Cheers, Medine
     
  5. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Excellent! Thanks Mark and Medine.
     
  6. Jayar

    Jayar Well-Known Member

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    These are a couple of questions I find very relevant to my case, and unfortunately I don't have the answers.

    But I sure as hell hopes someone does......I'd love some ideas, or views, or answers :confused:

    Thanks to all,

    Jayar
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I did some spreadsheets on capitalising interest ... and the answer as to whether this is a sensible thing to do long term depends greatly on the returns you are receiving.

    Remember how powerful compounding is for building wealth ?

    Well, when you are capitalising interest, you are compounding your COSTS, hence they grow very quickly ... and unless you returns are high enough to cover those costs, you will find yourself going backwards very quickly. Care is definitely required.

    When I get some time (*sigh*) I might put together some more spreadsheets that show what can happen in various scenarios if you capitalise interest.

    I'll leave the discussions of principle to others.

    Someone care to suggest some "general rules" for when capitalising interest might be a useful tool ?
     
  8. Dave

    Dave Well-Known Member

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    When you're pouring the distributions into non-deductible debt? ;)
     
  9. gazza

    gazza Well-Known Member

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    or when you are using the distributions to fund lifestyle :)
     
  10. Andrew

    Andrew Active Member

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    When the underlying growth of the asset is keeping up with the debt growth.

    andy
     
  11. Alan

    Alan Well-Known Member

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    Yes.......I guess this is the obvious one isn't it Dave. :)

    A few factors to consider........the fact that generally speaking, most of the income you receive from Distributions will be taxable...........what sort of 'buffer' you are comfortable with between 'return' and 'costs' etc.

    May I suggest as a possible future Article by one of experts, 'An Idiot's Guide to Capitalising Interest as Part of an Overall Investment Structure', and I'll be the first to read it. :D



    :)
     
  12. Jayar

    Jayar Well-Known Member

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    And I'll be a close second !!!!! :D

    Jayar
     
  13. gad

    gad Well-Known Member

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    And I'd be very close behind !!!!! :)
     
  14. Here_To_Learn

    Here_To_Learn Well-Known Member

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    Sim - would be great to see a spreadsheet ... this would help visualize some scenarios.

    I am terrible with Excel ! :(
     
  15. Davidr

    Davidr Active Member

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    Until Sim' or other more adept member has a chance to provide a more thorough spreadsheet, I have roughed up a very crude one showing capitalised interest on a margin loan situation.

    The yellow cells are variable. The blue make calculations.

    I set it to make all yield paid as quarterly distributions. The sheet takes this off the balance of the loan, thereby reducing debt.

    Of course to show how the loan will grow if you use the distribution for other purposes (e.g. lifestyle), set the yield to zero.

    Hope this helps.

    Cheers,
    David.
     

    Attached Files:

  16. Alan

    Alan Well-Known Member

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    Thanks David.



    :)
     
  17. Here_To_Learn

    Here_To_Learn Well-Known Member

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    Thanks David.

    It would be great to also see the Margin Loan debt rising on the same sheet. Would this be difficult to add ?
     
  18. Davidr

    Davidr Active Member

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    No worries HTL. The figures shown over the 20 years are how the different interest rates and distribution payments effect the Loan.

    So if you set Yield to zero, this effectively makes no payments on the loan. You will see how quickly capitalising interest will compound and the debt will get well out of control. Which is:
    If you meant something else, in the words of one of our colourful ex-senators, "..please explain".

    Cheers,
    David.
     
  19. Here_To_Learn

    Here_To_Learn Well-Known Member

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    Daviddr, spent some more time analyzing some numbers. I got it now ! Not for the faint hearted ...

    Got to love the power of compounding ! :D