Margin loan or self financed?

I am thinking about getting a margin loan for investing, however, I want to have sufficient cash on hand to pay the loan off in full if I get a margin call. Is there any point in this? Would I just be better off buying the shares outright from the beginning and not getting a loan, which accrues interest?

 

Probably better to go for the loan, (subject to your personal circumstances) you should get a tax deduction for the interest you pay.

Just make sure you keep some cash aside (say in a readily accessible online saving account or something like that) in case you get a margin call and don't get too aggressive.

 

Mathematically it's better to have no debt. I'd only use a margin loan if I wanted to have extra cash in an account for a rainy day.

Remember if your getting a tax deduction your spending a $1.00 to get back $0.30.

So if you have $X in a bank account and you want to invest $X there is really no point in borrowing that money. I'd only borrow if I wanted to invest $X + $Y.



Scenario 1 Margin loan LVR = 50%

shares = $20,000
Debt = $10,000 @ 9%
cash = $10,000 @ 6%

cost = $900 - $600 = $300 which after tax = ~$205

Scenario 2 No Margin Loan

Shares = $20,000
Debt = $0
Cash = $0

cost = $0

 

Getting a margin loan simply increases potential returns but increases risk as well, so you are more likely to lose everything. Risk tolerance is a personal preference.

If you have lots of cash aside, wouldn't that negate the purpose of getting a margin loan, which is to have more money invested?

 

Hmmm

Question to the OP:
Why would you want to pay the loan off "in full" if you get a margin call?

 

Have you considered bank loan instead margin landing credit? You could see your bank manager and borrow against your existing assets. Interest will be still fully tax deductible, you don’t get margin call in case thinks go south and you will still hold your cash just in case you need it. I don’t know much details but this is what I have done.

 

I would like the security of being able to pay my loan out in full without getting into the position of losing control of my securities (ie. margin call)

 

So margin loans really only make sense if you are willing to borrow against securities you hold instead of using cash as securiy.

 

margin loans are really only appropriate if you want to leverage your capital beyond what you could afford to invest.

would you borrow $500K to buy a house if you had $500K in cash?

 

Probably not. Thx for the replies.

 

If you are investing in shares only - you could locate a facility like Macquarie Prime - where you have a cash account and margin loan. Anything in the cash account offsets the interest you owe.