Margin Loans First margin loan

Hello,

I inherited some shares a while back and have decided to use some of them as security for a 60K margin loan (60K worth of shares as security) to be invested in blue chip aus shares and a small amount in 2 managed funds (property and overseas shares). The size of the loan is based on what I can pay back on an average income and I guess, from reading this forum, reasonably conservative since this is my first experience with leveraged investments.

I fall into a fairly young, mobile, committment phobic demographic and feel I am basically locked out of direct property while I stay single - hence like the liquidity of shares.

I could leverage myself *a lot* more and still have securities to transfer across in the event of a margin call. But I would not be able to pay down the loan on my income in this case.

What is the best way to use margin loans - pay off the capital similar to a property investment or just the interest?

I have read several posts from people on this forum who are in margin call and leveraged to 80% - is the result of fool hardiness or do most margin lendees stretch things to the max?

I'm not particularly risk averse, just getting the feel for this investment tool and would appreciate any comments from those with more experience.

Thanks in advance

 

maybe start with 30% LVR, and build up to 50% LVR.

I would also enter the market in stages, as you don't know if tomorrow we see another 300pt drop!

key is regular investing and dollar cost average your entry.

 

Thanks for your thoughts.

Sim, do you have any stats on the usual size loan for the average joe? I have heard 100K.

Also what about paying back the loan? One financial advisor (bank) I saw tried to convince me that this was a waste of money because that money would be better invested elsewhere... but that would only be true during periods of growth above and beyond the interest rate?

 

Hi Spanner,

You'd have to double check with different margin lenders to see what the average loan is. They may or may not give you this information.

Not sure which bank you went to (hopefully not a happy dragon).

r = The return you need to get before tax
i = Is the margin loan interest rate
t = Your marginal tax rate plus medicare levy

r = i / (1 - t)

eg, if your on a marginal tax rate of 30%, t = 0.315, margin lender 10.70% pa, i = 10.70%.

r = 10.7% / (1 - 0.315)

r = 15.62%

Using the above data, an investor may need to get a return of 15.62% to break-even with your loan. Borrowing for investment purposes may be tax-deductible to make it more attractive.

You can ask the adviser where he thinks you are going to get a return of 15.6% to break-even.

Cheers,

Dan

PS Before making an investment or borrowing decision speak to your FPA registered Financial Planner. Before making a taxation decision speak to your accountant or tax adviser for specialist tax advice.