Join our investing community

Managed Fund Reinvestments on Margin Loan

Discussion in 'Managed Funds & Index Funds' started by coopranos, 20th Jul, 2007.

  1. coopranos

    coopranos Well-Known Member

    Joined:
    11th Oct, 2006
    Posts:
    498
    Location:
    Perth
    Gday Folks
    Anyone have any idea how long it should normally take for distribution reinvestments to show up as additional units on your margin loan? Does this happen automatically, or do you have to do a security transfer for the new units? (I only care for LVR purposes thats all)
    Thanks for any input, appreciate it
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    It should happen automatically - but can take up to 30 days to process. Many margin lenders only get security updates from the fund managers once a month - so unless the update was instigated at the lender end (ie you purchased or sold units via instruction to your lender), it can take a while.

    You can usually contact your lender and request that they do an update earlier - some will, some can't.

    In general, I'd only bother chasing it if they were stopping me from doing something (like drawing down on the margin loan) because of the missing information.

    Funnily enough, St.George got my reinvested Platinum Asia units updated already, but are still valuing my NavraInvest units at a pre-distribution price (my LVR is about to skyrocket when they do update because the distribution was paid to an account outside my margin loan :eek: )
     
  3. Glebe

    Glebe Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    932
    Location:
    Sydney, NSW
    Due to refinancing and a lack of updating of units held due to re-investing, I've been sitting on an LVR of 110% for the last 20 days... :)
     
  4. coopranos

    coopranos Well-Known Member

    Joined:
    11th Oct, 2006
    Posts:
    498
    Location:
    Perth
    Cheers Sim
    So I guess that in some ways it is actually better to shoot your distributions out to non-deductible debt, rip it back out and reinvest it immediately - because you are making a new application for units it will process straight away. I only wish I had thought about this a month ago instead of just ticking the reinvest distributions box on my funds!
    Thanks again
     
  5. Bantam Roosta

    Bantam Roosta Well-Known Member

    Joined:
    7th Feb, 2007
    Posts:
    115
    Location:
    Canberra, ACT
    This won't necessarily work either. It can still take a while to sort itself out, at least with CommSec anyway. Also, depending on the market you may lose out by doing what you have mentioned above, because in a rising market, you won't get your funds in at the price they have dropped to after distribution, there will be a delay in you getting the distribution, then re-investing it again. Then there is the added paperwork on your behalf, when you can just leave to them, because it will sort itself out.

    My Platinum Asia unit prices have been updated, but not the re-investment of the distribution, so it doesn't make my LVR look too good, but nothing like Glebe's. :eek:

    I would say, don't worry about it. The lenders know it happens. Just ride it.

    BR
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    Not necessarily - as BR mentioned.

    Don't forget that most fund managers process reinvestments without applying the buy spread - so you're getting more units for your money. It's not much (0.15% - 0.2% usually), but every little bit helps. If you are going to reinvest anyway - I say do it automatically.

    Personally I don't reinvest automatically (my Platinum Asia ended up that way when I refinanced - but I'm building up my holdings there so happy to leave it reinvest for a while). I take all my distributions as cash - some of that cash is used for debt management and the rest will be reinvested when I get suitable buy signals.
     
  7. coopranos

    coopranos Well-Known Member

    Joined:
    11th Oct, 2006
    Posts:
    498
    Location:
    Perth
    True but say for example:
    $20k distribution
    0.2% loss for the buy spread = $40.
    That $20k goes of non-deductible debt incurring 7.5% interest p.a., meaning an extra $1,500 deduction, or $500 in your hand extra (at 30% marginal rate), not only this year but every year forever, plus another $500 added each year ($1k yr 2, 1.5k yr 3, etc until no more non-deductible debt - actually it is more than this when new units are purchased with the reinvestment and you add that $500 into the equation).
    Regarding the issue of the price move between reinvestment date price and payment date price, it is just as possible for this to work against you as for you, and over the longer term would probably average out to close to even anyway.
    Its not a major thing, but the little 1%ers do add up
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    Hangon - so you are now talking about taking the cash to decrease your debt rather than reinvesting ?? That's a completely different argument to whether you should automatically reinvest or should take the cash and then reinvest later.
     
  9. coopranos

    coopranos Well-Known Member

    Joined:
    11th Oct, 2006
    Posts:
    498
    Location:
    Perth
    no no, distribution paid into non-deductible homeloan (with redraw facility). Immediately redraw the amount of the distribution and reinvest into more units. The amount of the distribution then becomes a fully deductible portion of your otherwise non-deductible homeloan. You simply are paying the homeloan down with income, then borrowing to invest in more units.
     
  10. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    Ahh sorry - well if you are talking about debt recycling like that, I say do it and don't sweat the buy-spread or the timing issues :D
     
  11. voigtstr

    voigtstr Well-Known Member

    Joined:
    24th Jan, 2007
    Posts:
    679
    Location:
    Hobart
    Do you just have to show your accountant whats been been redrawn and show that its been paid into the managed fund to make a percentage of your home loan interest deductable? You dont need splits or LOCS or any other feature of the loan apart from redraw facility?

    cheers
    Simon
     
  12. coopranos

    coopranos Well-Known Member

    Joined:
    11th Oct, 2006
    Posts:
    498
    Location:
    Perth
    The type of loan and structure should really make no difference, the deductibility of interest is determined by tracing where the money went - if it is to fund assets that produce a taxable income, then it is deductible.
    It can definitely get tricky if you are using one big loan and recycling through that (ie the loan has a mix of deductible and non-deductible debt), however your accountant should be able to work it out.
    Personally I am a bit wary of any split loan facility, only because these have been criticized by the courts in the past (where interest on deductible portions were capitalized and all repayments funnelled through the non-deductible debt which was essentially seen as tax avoidance).
     
  13. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    Isn't the problem with a mixed loan the fact that any repayments must be apportioned ?

    This is good for converting initial non-deductible debt into partially deductible. But if you are starting with a deductible loan then it is often better to quarantine it for flexibility of repayments.

    Rob
     
  14. coopranos

    coopranos Well-Known Member

    Joined:
    11th Oct, 2006
    Posts:
    498
    Location:
    Perth
    That is my understanding