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Line of Credit question

Discussion in 'Finance & Banking' started by Glebe, 31st Jan, 2006.

  1. Glebe

    Glebe Well-Known Member

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    Hi,

    Say I've got a $300 000 IP that is debt free. As far as I understand, I can apply at the bank for 80% of this value to invest elsewhere (say a PPOR) via a LOC.

    But say I've got $300 000 in the sharemarket, debt free. Can I still apply somewhere to borrow X% of this value to invest in a PPOR?

    I'm going to take some type of mortgage out at some stage, but don't want to have to sell my shares to access their equity.

    Thanks.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yup, it's called a margin loan. It's just another LOC (with a few gotchas like margin calls that you need to be careful of - but essentially the same). You should be able to draw down on your margin loan LOC any available funds and use them for anything at all.

    If your portfolio consisted of blue chip stocks (or funds) with a maximum gearing ratio of 70%, but you decided to limit it to perhaps 60% to give yourself a buffer, then that 60% on a $300K portfolio will get you $180K in your LOC.

    Alternatively, you could use the margin loan to buy a further $450K worth of shares/funds @ 60% LVR, for a total portfolio value of $750K !!!!!
     
  3. NickM

    NickM Co-founder Staff Member

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    Just remember Glebe if you use the funds to purchase a PPOR then the interest will not be tax deductible

    NickM
     
  4. Mark

    Mark Member

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    Hi Glebe

    Nick's point about being non deductible is an important one.

    If its another IP against which you want to borrow to pay towards a PPOR it would be non deductible. Because we (NFS) don’t recommend selling property assets easily one may have to accept the non-deductible issue. If it is shares or managed funds (MF) however you may want to consider the following approach.

    If you get a margin loan against your $300k share portfolio you could get up to 70% (depending on the shares or managed funds) but you would most likely limit your loan to 50 or 60% to give you some breathing space. So at 60% you would have $180k to pay towards your PPOR.

    If you sell all your shares/MF you could then use the full $300k (less CGT and possible exit fees) as a deposit thereby reducing your non deductible debt against your PPOR. Then go back to your bank, establish a new LOC against your equity to the 80% LVR, and reinvest that into the market with a margin loan. The interest on the LOC would then be fully deductible. Let’s go through the numbers:

    Case A (leverage against existing shares)

    Assume PPOR = $800,000 - $180,000 (60% loan against shares) = $620,000

    Assets
    PPOR $800,000 + Shares $300,000 = $1,100,000

    Liabilities
    Non deductible $620,000 + $180,000 = $800,000

    Deductible $0

    Case B (sell shares)

    PPOR = $800,000 - $300,000 (sale of shares) = $500,000

    Redraw difference between home loan and 80% value of the PPOR as LOC for investment purposes= $140,000
    Invest the $140,000 with a 50% margin loan into shares = $280,000

    Assets
    PPOR $800,000 + Shares $280,000 = $1,080,000

    Liabilities
    Non deductible $500,000

    Deductible $280,000

    So for a very similar asset value case B has a more favourable debt situation.

    Of course this example does not take into account CGT, stamp duty and other property costs and possible exit fees on MF .

    Mark
    (Please do not consider the above as advice!)
     
  5. Glebe

    Glebe Well-Known Member

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    Thanks guys, I'll have to go over these numbers when I get a chance to concentrate...

    Edit:

    OK, went over the numbers. I agree option b looks better, it just seems rediculous that I'd need to sell the shares, pay cgt etc, just to buy them back again.
     
  6. Mark

    Mark Member

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    Possibly the amount of CGT and other costs can discourage you from doing this. It boils down to the decision of whether it is worth paying a price now to lay the best "debt foundation" for the future of your portfolio, or not "waste" CGT and other costs. You have to go through the exercise.

    Mark