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Margin Loan Limit

Discussion in 'Managed Funds & Index Funds' started by HHH, 23rd Jul, 2007.

  1. HHH

    HHH Active Member

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    Hi Everyone

    I need some clarification on a margin loan issue so I know what I am talking about when I speak to the bank tomorrow.

    We recently got a margin loan of 50K, added 50K of our own cash and have invested in a managed fund.

    We took the option to have the interest prepaid (12mths) and capitalised on the loan.

    I missed their call today, but the bank is contacting us to say our margin loan is over the credit limit.

    Now on the surface I can see the problem, (I assume 50K is the "credit limit") but how were we supposed to have the loan setup so we CAN capitalise the interest.

    Surely we were not meant to invest only a certain percentage of the margin loan, allowing for the interest capitalision?? Doesn't make sense. Eventually that would be eaten up anyway.

    Our main reason for capitalising the interest was to help with cashflow, and we were just going to keep a watch on our LVR based on the growth of the fund and just make randam payments into the margin loan if there was not sufficient growth in the fund to keep us within a comfortable LVR range.

    FYI - our lender allows upto 75% LVR on our particular fund.

    I only ever believed there was the LVR "issue" that need monitoring, how does our margin loan credit limit fit into all this?

    thanks in advance
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Okay - first off, you need to follow this up immediately with your margin lender tomorrow - otherwise they may sell down some of your investment to bring the loan back below the limit (which is not a problem if that's what you intend, but best to talk to them so you make your intentions clear).

    Now, if they allow a 75% LVR on the fund, and you have $100K invested in that fund (and it is still worth $100K and hasn't dropped in value ???????) ... then your credit limit should be $75K (which is 75% of $100K).

    Your original loan was $50K, so you should have had a $25K buffer.

    Now, if you've pre-paid 12 months worth of interest and capitalised it, then, assuming an interest rate of 9%, you've added an extra $4,500 to the loan - taking your loan balance to $54,500 ... still far below the credit limit. It will possibly be more than this, depending on how they treat the interest on that capitalised interest - but either way, it's not going to make that much difference).

    So, unless your fund value has dropped significantly, you should be fine I would have thought ?

    However ... did you invest just before the end of financial year distribution ? And if so, how much did your fund drop in value post-distribution ?

    If you invested in NavraInvest (for example), in late June, your $100K would have got you around 82706 units, which would now be worth only $93.9K ... which drops your loan limit to around $70.5K ... which is still a lot higher than where your loan should be - but you get the point about how much that can drop post-distribution. The way to deal with that is to either reinvest your distributions, or have the cash paid directly into your margin loan account.

    So, given that this is unlikely to be the problem (is it ?) - can you log into your online banking for your account and find out A) what the current value of the fund is according to your lender, and B) what the current value of your loan is ... and perhaps we can get to the bottom of this (because on the surface I can't really see what their problem is, unless you have some weird product that has strange rules).

    ... so the other question is ... which lender and which fund ? (if you don't mind me asking) ?
     
  3. HHH

    HHH Active Member

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    Thanks for the Quick reply Sim

    The fund is Navra and the lender BOQ. Interest is only 7.79%.

    It is really weird because we had the loan approved June 29, but they have stuffed us around for over three weeks and only just last week send the cheque off to Navra.

    We still haven't received anything from Navra so I don't know what unit price we bought at or anything yet.

    Your explanation is very clear and is what I understood also, so It really looks like some sort of problem on their end, unless there is something weird with BOQ's margin loan product??

    So to summarise,
    - loan approve and interest capitalised June 29.
    - Stuffed around for weeks
    - Chq sent off to Navra only last week
    - Still no confirmation or proof of investment
    - BOQ call to say margin loan is over credit limit???
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I suspect that the problem is at their end - some paperwork hasn't been processed, or an automated system has flagged an issue that doesn't actually exist ... call them first thing and get them to explain what the problem is.
     
  5. HHH

    HHH Active Member

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    Ok Sim, it seems to be a BOQ specific product issue.

    In addition to LVR requirments, BOQ have a loan credit limit.
    When we applied for the 50K margin loan, they set our credit limit by default to 50K. So as soon as we capitalised the interest for the first 12months, we were instantly over our "credit limit".

    None of this was explained to us, even though our intentions to prepay and capitalise the interest were made very clear!

    Apparently it is just a matter of calling them and simply over the phone increase/decrease our loan credit limit, no questions asked. We can set it to a max of 3million over the phone - just like that.

    I find it annoying that we now have to monitor our loan credit limit as well as the LVR. And we can't just set it to the max of 3 million and forget about it, as that will show up on future credit checks down the track, so we have to keep it pretty close to the actual amount of the loan.

    Have you heard of this before? Seems pointless to me.
     
  6. Simon

    Simon Well-Known Member

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    Leveraged Equities don't have that.:)
     
  7. FrankGrimes

    FrankGrimes Well-Known Member

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    Neither do BT. Providing your margin is in check they couldn't care if your loan was 10k, 100k or 1000k :)

    That is a low interest rate though. I believe commsec does the same thing.
     
  8. bundy1964

    bundy1964 Well-Known Member

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    Sounds a strange way to do business to me. I like the BankSA outlook on limits "You will find a limit your comfortable with before you hit ours."

    ANZ once you go over 3 mil make you jump through hoops to get more.
     
  9. DaveA

    DaveA Well-Known Member

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    comsec have the same form of limit...

    but theres you have to change it via writing and my first increase wasnt that easy, but still was done...
     
  10. Muz

    Muz Member

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    Sounds strange to me

    Hi HHH,

    I have a margin loan set up thru BOQ (Macquarie Bank). I only wanted to buy $2000 of Navra ($1000 cash and $1000 margin loan) and have a credit limit of $250,000!!

    Ring them and get set up for internet access. I was able to monitor everything from there whilst they were setting everything up.

    We also had a delay in them sending off my applications to Navra til I rang and chased it.
     
  11. Rick

    Rick Well-Known Member

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    Same sort of thing happened to me when setting up a commsec margin account a couple of weeks ago.

    The day they approved the loan I bought a small parcel of shares and got notification of a margin call the next morning, which I thought was pretty funny and sort of expected.

    I'd written on their forms that I wanted to transfer some shares from an existing commsec account to be used as the security for the loan, but they just ignored that and went ahead with everything else.

    Had to increase credit limit as well, to cover the capitalised interest so I could invest the original amount I wanted to invest.
     
  12. vandalic

    vandalic Active Member

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    Rick - I'm also with Commsec for my margin loan and even though I submitted a broker transfer form to transfer my shares to use against the margin loan,
    rang them a few times to ensure my margin loan was sorted to which they confirmed, sure enough I made my first purchase and I'm hit with a margin call :)
     
  13. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Hahaha - I find that all very amusing ... their systems obviously need to be completely rewritten if they generate so much additional administrative work so easily.

    Fortunately I have not come across anything like that yet - customer service is one of the most important criteria for me to choose who I deal with - I don't want to be putting up with their crap systems when there are other good choices out there.
     
  14. DaveA

    DaveA Well-Known Member

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    my transfer took nearly 9 weeks to complete, as i had to change a name on a holding as it didnt have my middle name and the loan did... i rang them asked them the name it should be and they told me the letter was needed, tried the transfer again and failed, it actually needed the whole name, and that cost me another 3 weeks...aditional to that everything it failed, i never heard anything so i had to ring and follow up (and wait on hold 30 mins)

    the unit price in this time went up about 8%, so thanks comsec...

    ill never sign up with them again, and as sim is saying, customer service is #1 and something ill be paying more attention to... *i do wonder how good suncorps customer service is if anyone can comment*
     
  15. vandalic

    vandalic Active Member

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    It's the age old situation that you don't know about the quality of customer service until you experience an issue first hand.

    Also, other people's recommendations don't always turn out great either, as they may have had one bad experience and generalise about that firm overall which may be exceptional at customer service.
     
  16. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Indeed, companies change. LevEq lost quite a few staff to other lenders actively headhunting a while back and their service went bad very quickly. Fortunately, the new staff that came on board proved to be excellent, and I have had great service since.