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Margin loan or self financed?

Discussion in 'General Investing Discussion' started by broadscott, 15th Oct, 2008.

  1. broadscott

    broadscott Active Member

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    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?
     
  2. C3PO

    C3PO Well-Known Member

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    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.
     
  3. Young Gun

    Young Gun Guest

    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
     
  4. Norak Bastiat

    Norak Bastiat Well-Known Member

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    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?
     
  5. C3PO

    C3PO Well-Known Member

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    Hmmm

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

    dudek Well-Known Member

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    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.
     
  7. broadscott

    broadscott Active Member

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    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)
     
  8. broadscott

    broadscott Active Member

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

    Young Gun Guest

    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?
     
  10. broadscott

    broadscott Active Member

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    Probably not. Thx for the replies.
     
  11. samaka

    samaka Well-Known Member

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    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.