Join our investing community

First margin loan

Discussion in 'Shares' started by spanner, 25th Jul, 2008.

  1. spanner

    spanner New Member

    Joined:
    1st Mar, 2008
    Posts:
    3
    Location:
    Warwick, Qld
    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
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    I've read stats that show the average margin loan LVR was around 40% or so.

    At 50% this puts you in the slightly more aggressive camp than the average investor then.

    How high you can safely go depends largely on the types of investments you hold in your margin loan - more highly volatile investments (eg small caps, resources, etc) can play havoc with your LVR.

    ... but then right now - even the banks are volatile!!
     
  3. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    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.
     
  4. spanner

    spanner New Member

    Joined:
    1st Mar, 2008
    Posts:
    3
    Location:
    Warwick, Qld
    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?
     
  5. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    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.