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Margin Loans Margin Loan Interest Capitalized

Discussion in 'Finance & Banking' started by Jayar, 6th Jan, 2007.

  1. Jayar

    Jayar Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    130
    Good Evening,
    I have a margin loan where the interest is capitalized. It has been going for just over 12 months, and I wonder if any of you can give any advice as to how long I should continue, without paying the interest bill.
    At present, my LVR is just over 50%, and hasn't varied all that much since inception.
    Is there a time limit on this capitalization?
    Would appreciate your views.
    Jayar
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
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    Location:
    Sydney, Australia
    So long as your holdings are growing faster than your debt, what's the problem ? I'd still keep an eye on it ... and you want to make sure you have a sufficient buffer, but I'd say that 50% LVR is a very good place to be. At that level for a fund with a 70% max LVR and 10% buffer, you'd need a 35% drop in market value to see a margin call (30% drop for a 65% max LVR fund).

    If you have some good growth funds returning well in excess of the interest rate you are paying, you should see the LVR drop, provided you are either reinvesting the distributions or paying them into the margin loan (not taking them as cash in hand).
     
  3. Jayar

    Jayar Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    130
    Hi, Sim,
    Thanks, once again, for your valued response.
    Cheers
    Jayar
     
  4. Here_To_Learn

    Here_To_Learn Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    315
    Location:
    Sydney
    What is important is your net equity position. In the case of Managed funds it would be Total value of fund - loan value.

    The challenge is that many people ( including myself for years ) only focussed on the debt. The bigger the debt the more anxious I used to get.

    Now I focus on net position.

    PS - I also capitlise interest.