Margin Loans Leveraged Equities Investment Loan

I read the Investment Loan flier at http://www.leveraged.com.au/BADoc/B0715-LEInvestmentFlyer.pdf and find that this loan:

- borrow up to 100%
- no margin calls.
- Interest Rate 1 year:
$50,000 - $249,999 9.20% p.a.
$250,000 plus 9.05% p.a.

I wonder why this interest rate is quite slow compared to portfolio protected loan? We can borrow up 100% investment, no margin call and interest rate of 9.20%pa. So, why we have to use margin loan (borrow 60-70% , margin calls and the same interest rate).

I do not sure if I fully understand the Leveraged Equities Investment Loan flier.

 

Think of an investment loan as the same as a margin loan, except instead of an max LVR of 75% or so, it's 100%

The minimum loan amount is higher than your typical margin loan (50k compared to 20k), but if that's not a problem then investment loans are good for those who fear of getting a margin call.

ps: It's also more difficult to get approved as from a lending view it's higher risk

 

Evisional,
the loan rate may appear to be reasonable because the loan is for investments with capital protection included within the investment, i.e.; the lender has minimal risk on lending to a capital guaranteed product.

The terms of the investment loan are much more rigid than a margin loan as the loan is fixed for the period of the investment and interest must be paid rather than allowing the option of capitalising the interest. You have no ability to increase your loan and investment capital over the term of the loan. It is a fixed term investment, extremely restrictive when compared to margin loan investments.

Now on to the capital guaranteed investment. Capital guarantees are not free and usually come at a considerable cost built into the performance of the product, via complex derivatives, insurance or hedging. You may get back your original capital, but because of the capital guarantee costs, can produce a relatively low yield on your capital investment. So when you take into account interest paid and the return of capital to the lender, you could be looking at very modest or negative returns. If you decide to exit the investment early capital is not guaranteed.

Capital guaranteed products are targeted at high income earners who can afford interest repayment costs with no income until maturity of investment and so engage in a period of negative gearing to reduce taxation rates.

One hundred percent loans on capital guaranteed products are great for lenders as their goal is to lend as much money as possible with as little risk as possible.

Tasmo

PS The notion that you are not taking a risk with capital guaranteed products is false, you are taking a risk that the investment will perform. The lender has a much lower risk as they are spreading their loans over a broad consumer base. The investment provider is charging you within the product for the capital guarantee, and also offers no guarantee on performance. You can see that I don't favour capital guaranteed products!

 

Thanks Tasmo and MiddleClassMonkey.

I have downloaded their brochure and read more carefully to ensure understanding all terms and conditions before applying it.



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My Blog at » Investing Wealth Knowledge

 

And capital protection features are not tax deductible but add to the cost base for CGT.

Another reason some investors don't like similar products is that once they are locked into hedges & put contracts they are reluctant to sell and change their investments because of costs of adjustment.

Cheers,

Rob

 

At the extreme capital end of the scale is Endowment Warrants.

The difference here is that the security is legally owned by the lender who gets the distributions & franking credits.

When it is paid out, ownership transfers to you but if the market dives you can walk away.

Quite different from margin loans or instalment warrants. The less your risk then the less the return.

Cheers,

Rob

 

Thanks Rob.

I found this text on the ATO website

I am not sure the latest regulation of tax duction on captal protected products.

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My Blog at Wealth Knowledge

 

Has anyone used Leveraged Equities Investment Loan here?

I am new to this product? I wonder how it works. After the application is approved, I can withdraw the loan in cash and buy shares or I have to request them to buy shares on behalf of me????

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My Blog at » Investing Wealth Knowledge

 

Rely on Firth's case at your peril.

Anticipating problems with this case, the Government announced interim legislation retrospective to April 2003 pending enactment.

Cheers,

Rob