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Margin Loans Margin Loan Question

Discussion in 'Finance & Banking' started by coopranos, 12th Apr, 2007.

  1. coopranos

    coopranos Well-Known Member

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    With a margin loan is it possible to withdraw cash from the loan (assuming the total LVR remains at the acceptable level)?
    I ask because there is a lot of discussion about investing in income funds and using the excess income to fund shortfall on properties. If you can withdraw cash then as long as you are getting the capital growth you can keep your LVR on track and just use the equity built up to fund the shortfall.
    Thanks for any thoughts.
     
  2. Simon

    Simon Well-Known Member

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    The income gets paid to you quarterly, or annually directly to your nominated account.

    If you draw from your margin loan for investment reasons you are OK - but if you do so to fund lifestyle then you will make things messy.
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, you can do exactly that.

    Most margin loans operate pretty much just like a LOC - you can add/redraw cash at any time (just watch out for the tax implications if you use that cash for non investment purposes !!).

    So long as you are happy with increasing debt levels, you can potentially achieve a better (more tax effective) result than income funds by investing in growth funds and drawing down cash from the margin loan as required to fund your cashflow requirements. This is essentially living on equity (or at least "drawing on equity"). You could also consider it capitalising your cashflow requirements by drawing from one loan to pay the costs of another loan. Of course, there are risks with such a strategy.
     
  4. coopranos

    coopranos Well-Known Member

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    Excellent, thanks for that info sim.
    if that is the case, then the idea of growth funds seems pretty appealing, because you dont lose your growth each year through tax. I guess the major issue is, in terms of doing this to fund cashflow shortfalls on property, is that you are funding a 7.5% debt at 8.5%. However from what i have seen the total return from income based funds is usually less than the income+growth return from more growth oriented funds.
    Anyway, that is really helpful from a planning perspective, and gives some really interesting options, cheers for the info!
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    From a risk management perspective, income funds are great in that they lock in the returns ... where growth is a "paper profit", that can just as easily disappear unless you realise them (in which case you pay tax as well - although potentially at a discount).

    Don't dismiss income funds completely ... they have their place in the world ! Depends on your goals and strategy really.

    The thing a lot of people seem to miss is that you don't have to choose one or the other type of fund exclusively - you can hold multiple types of funds (indeed multiple types of investment) for different reasons ... they should complement each other.