Margin Loans Margin Load - How long is it worth having it?

Most margin loans are basically a revolving line of credit. In theory, you never have to pay them back.

From an investment point of view, the idea of IO loans (including lines of credit and margin loans) is that you pay the loan off at some point in the future, using tomorrow's dollars (which are worth more than today's due to inflation).

In other words, a $100,000 loan today will seam like a lot less in 30+ years time due to the effects of inflation!

The cost of doing so is the interest you pay along the way - so your total returns need to be higher than the interest rates to justify the expense.

mmm ... I think perhaps you are confusing the term "capitalising interest" with "capital lost" ?

Margin loan interest is tax deductible as you are making investment returns from that borrowed money (assuming you don't draw down on the margin loan for personal use !!!).

The cost of interest is deducted from the income you earn from your investments to calculate your net return.

If you choose to pay the interest using borrowed money, this is called "capitalising interest", but that has nothing to do with capital losses as such.

 

Usually those fixed terms are fixed interest terms ... at the end of the term you either choose a new fixed term, or your loan reverts to the standard variable rate.

 

Like all LOCs, any extra cash you pay into the loan account comes straight off the principal. You can generally redraw that up to your margin limit at any time.

The nice thing is that you margin limit will automatically increase as the value of your investments increase (assuming you didn't artificially cap your limit at the time of your application).

Of course the flip side to this is that your limit will also automatically decrease as the value of your investments decrease ... this can have ramifications if you end up in your buffer zone - means you can't redraw any cash from your margin loan until the LVR drops again (or you sell some investments).

 

Yes, to be clear ... there are two important numbers ... your maximum LVR, and your buffer size. If (for example) your entire portfolio is made up of funds/shares which your lender offers 70% LVR on, then your maximum LVR is 70%. You also get a buffer (usually 5% or 10%) above this. For example, if your maximum LVR is 70% and you have a 10% buffer, then you won't face a margin call until your LVR hits 80% (or there abouts ... it can vary depending on how the lender actually calculates things!!).

The trick to watch out for is that as soon as you hit your maximum LVR (70% in this example), you generally can't redraw any cash from the loan, since you are already in your buffer zone. This can be a trap if you are "parking" cash in your margin loan to get the high effective returns on your savings (better than a savings account) ... if the market drops suddenly and you enter the buffer zone, you won't be able to pull your cash back out until your LVR drops again. This can be quite nasty from a cashflow point of view.