Margin Loans Margin Loan questions

Discussion in 'Sharemarket Investing Platforms, Tools & Services' started by Glebe, 26th Feb, 2006.

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  1. Simon

    Simon Well-Known Member

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    When you run out of available equity they will call for funds or sell some of your asset.

    Cheers,
     
    Simon, 29th Mar, 2006
    #21
  2. MJK__

    MJK__ Well-Known Member

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    The do get paid every time they add interest to your loan they are taking from your equity and adding to their books at the same time as selling more loan-increasing your drawings. Its an on paper thing. Weird I know.

    Its like collecting interest and writing new loans at the same time.... then collecting more interest then writing more loans....

    MJK
     
    MJK__, 29th Mar, 2006
    #22
  3. pudsa

    pudsa Active Member

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    Capitalisation

    Thanks Simon and MJK, appreciate the response.

    Unfortunately am still confused (am a beginner at this stuff). Your comment Simon about when I run out of equity then we sell some stuff (margin call??) got me thinking. If the Navra Fund performs then capital growth occurs and my equity rises therefore I may never get into a situation of having to sell assets particularly if I started off with say a 50% LVR. So if my loan is increasing (initial loan + interest) but I'm achieving sufficient capital growth from investments so that my LVR (50%) is not changing then when do I pay back either my initial loan and/or the capitalised interest. After all the margin lender cannot simply lend and capitalise forever they obviously have to have funds coming back in.

    Cheers
     
    pudsa, 29th Mar, 2006
    #23
  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    But they do have funds coming back in - as MJK said, they are taking part of your equity ... that's how they get "funds coming back in". It's all paper money - nothing is real.

    In the same way, as my portfolio grows in value, I borrow more money to buy more investments ... so, without adding any more of my own money - I continue to increase my holdings. No cash changes hands between me and the lender in this process - it's all paper money - they take it out of my LOC based on the increased equity in my portfolio.

    They get their "cash" when you sell down your investments - because your loan has increased as a result of capitalisation, you need to pay down part of the loan when you sell, to maintain your LVR within the limits. Hence, your net profits are reduced by the extra capital you've had to pay off the loan.

    The key is that the margin loan is usually a revolving line of credit, which has no fixed term (unlike most house loans). This means that, provided that the margin lender is getting some return (either from you paying the interest, or from you "paying them with equity" through capitalising interest), then you can effectively continue doing this forever (in theory).

    This works because they protect themselves from the equity falling too low with the margin system - if your equity drops below a certain level, they ask you for more cash, or else sell off some of the holdings to pay down the outstanding debt ... and they get their money that way.

    Wonderful isn't it ?

    (But do make sure you fully understand how margin loans work before you get one - there are traps for the unwary that can impact badly on your returns).
     
    Simon Hampel, 29th Mar, 2006
    #24
  5. pudsa

    pudsa Active Member

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    Capitalisation

    Thanks Sim,
    Appreciate the detail in your response, getting much clearer.
    Cheers
    Pudsa
     
    pudsa, 30th Mar, 2006
    #25
  6. pudsa

    pudsa Active Member

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    Margin Loans

    Sim,
    Just read your response to Maverick on Margin Loans which you made earlier. This has made things a lot clearer and was very helpful.
    Your inputs are appreciated.
    Many Thanks.
    Cheers
    Pudsa :)
     
    pudsa, 30th Mar, 2006
    #26
  7. Maverick__

    Maverick__ Well-Known Member

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    Excel example

    I've put the example into excel. You are welcomed to play with your numbers :)
    Thanks a lot to Sim.
     

    Attached Files:

    Last edited by a moderator: 30th Mar, 2006
    Maverick__, 30th Mar, 2006
    #27
  8. pudsa

    pudsa Active Member

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    Margin Loans S'sheet

    Hi Maverick,
    thanks for the spreadsheet, I'll have a play with the numbers.
    Cheers
    Pudsa :)
     
    pudsa, 30th Mar, 2006
    #28
  9. MJK__

    MJK__ Well-Known Member

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    Another thing to think about is the cost of the money to the margin lender. Say the lender gets their funds for 5.5% and then lends to you at 8%.
    Every time they take interest from your account they allocate 2.5% to profit. Then they lend the funds back to you for another round. Allowing you to capitalise is selling more loan at a 5.5% cost with an 8% sell.

    I think? :eek:

    MJK :D
     
    MJK__, 30th Mar, 2006
    #29
  10. 24724

    24724 Well-Known Member

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    Capitalizing Interest

    Just a quick question..
    If I have a margin loan and pay the interest at the end of each year, is that what is meant by 'Capitalizing Interest'?
    Thanks
    Jayar
     
    24724, 30th Mar, 2006
    #30
  11. Glebe

    Glebe Well-Known Member

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    Jayar,

    In your example you were probably capitalising the interest throughout the year before you paid it off at the end of that year.

    Be careful not to confuse it with pre-paying interest at the end of a financial year for a loan to be utilised over the following financial year (ie in advance).
     
    Glebe, 30th Mar, 2006
    #31
  12. 24724

    24724 Well-Known Member

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    Glebe,
    Thanks for that...understood.
    Jayar
     
    24724, 31st Mar, 2006
    #32
  13. Glebe

    Glebe Well-Known Member

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    Comsec have just offered me a margin loan - 7.35% fixed for 12 months in advance. No transaction fees and free access to Pro Trader platform. This is on a $550k loan.

    I've told them the only sticking point is that they don't accept Navrainvest on margin, the person I spoke to said he'd look to see if NAV0002AU can be added, even as a one off. I'll keep you all posted.
     
    Glebe, 18th May, 2006
    #33
  14. pudsa

    pudsa Active Member

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    Margin Loans

    Thanks for that Glebe. I for one would be very interested in the outcome, am with LE at the moment.
    Cheers
    Pudsa :)
     
    pudsa, 18th May, 2006
    #34
  15. TwoDogs

    TwoDogs Well-Known Member

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    I have a ML with Colonial, and their rates are higher than Comsec even though owned by same bank. Go figure. But they do offer all Navara funds.
     
    TwoDogs, 18th May, 2006
    #35
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