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Looking at ways to reduce interest/debt

Discussion in 'Investing Strategies' started by Alwayslooking, 4th Dec, 2007.

  1. Alwayslooking

    Alwayslooking Well-Known Member

    11th Jun, 2006
    My World
    Hi All
    Over last 6 years have been investing in property only, I have now reached a point that I think I need to look at other options, in part to reduce my negative liability which is about $55K pa (capitalised interest). LOC has been set up for this for at least 5 years cover.

    I started looking at investing in blue chip shares and to date have purchased about $100K, which include BHP, CBA, QBE, PPT.
    I have a LOC set up $500K and was also looking at using a ML, and purchasing a total of around $1M in shares.

    I don't have any real direction and I need some help/advice on long term strategies I could use to improve my income and welcome any suggestions that may be working for you.

    Cheers, AL
  2. Rod_WA

    Rod_WA Well-Known Member

    18th May, 2007
    Inglewood, WA
    Sounds like you're well on your way.

    A $500k LOC and 50% LVR into ML for $1m in blue chip shares... assuming 3.7% dividend and 85% franking, 8% LOC and 9.2% ML, you'd be up for a significant cash shortfall, about $19k (marginal tax rate 46.5%), $21k (41.5%) and $24k (31.5%), after taking into account interest, dividends, franking credits, 100% tax deductibility on interest, etc.

    In other words, a significant direct share portfolio won't immediately help your cashflow!

    Are you considering income funds? If so, you're probably in the right place - there are a lot of Navra fans around here.

    Would you be capitalising the interest in the ML? This could push up your LVR quite quickly if the sharemarket tracks sideways for a while.

    Just some opening thoughts for you to consider.
  3. Venger

    Venger Member

    30th Jul, 2007
    Brisbane QLD
    Hi Always

    I'll assume if you've been property only for the last 5 years or so you are negatively geared to the point where you are on a 31.5% tax bracket.
    If you are capitalising interest and having serviceability issues I'd like to focus your mind on risk management issues.
    If interest rates rise enough, it may depress share valuations and returns, and house prices enough that a strategy of LOC + Margin loan will be problematic.

    Why not exercise a bit of caution and avoid the ML if serviceability is an issue?
    A $500k LOC gives you plenty of purchasing power and a lower interest rate than the ML giving you a chance to keepp a little more of the return for yourself.
    Browse this site for income generators but as part of your diversification strategy allow me to suggest:

    BBI Price $1.60 Forecast Div $0.15 100% tax deferred with some upside potential. Its an infrastructure fund with high divs so hopefully it will have downside resistance if it comes to a crunch.

    Invest $100,000 from LOC
    Distribution $9375 which does not appear on your tax at this point.
    Interest Paid: $7870 @7.87%
    You get a tax refund $2479 @31.5%
    Your after tax profit: 9375-7870+2479 = $3984

    Thats a 4% cash return on your $100,000 loan with interest already paid. Not much after you take out the inflation factor but what the heck. There has to be some downside if you are not putting any of your own capital in. The deduction you get for the interest can help offset some of the tax liability of your other share based investments but its easy to imagine that with enough invested this way you'll end up getting a low income tax offset and the ability to have the Commonwealth top up your undeducted super contribution.

    There are higher return rates like this about, but they carry significantly more risk. BBI is quite liquid. Ex div date @21 Dec, paid in March based on previous performance.

    Seek advice - I'm no expert.
  4. Alwayslooking

    Alwayslooking Well-Known Member

    11th Jun, 2006
    My World
    Why buy MF

    Thanks everyone for the feedback.
    I am looking at BBI and also read something on Lincoln Australia (Retail) but this CG fund.

    Lincoln Aust fees are 1.75 pa can ML at 70%.
    They have had an incredibly good run over the last 3 years, but surely in a bull market this is what would be expected.

    I am started to wander whether to purchase MF when I could purchase high income shares direct, ie banks, Wesfarmers etc. which are fully franked and I wont need to pay the costly fees.