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Margin Loans Margin loan to pay out personal loan?

Discussion in 'Finance & Banking' started by Ol School Skata, 8th Nov, 2005.

  1. Ol School Skata

    Ol School Skata Well-Known Member

    7th Nov, 2005
    Hi all,

    First just wanted to introduce myself. Went to Steve's course in Brisbane a couple of weeks ago. A lot of it i had read about on various forums but was still interesting to hear Steve's thoughts on Rental reality, LOE, cashbond, property selection, DCT etc.

    Mark - my fact finder is coming being prepared as i write this and should be sent to you within a day or 2.

    I have posted this at another forum but wanted a second opinion or bounce it off some others.

    I currently have some shares valued at $53000 and have a personal loan with a balance of $16000 that was used to purchase some of these shares. Loan repayments are approx $450 month (P&I).

    Initally I wanted to redraw some funds from my LOC on an IP to pay out this loan. I believe the interest on this $16K redraw would be tax deductible as all shares currently are paying dividends. (Anyone confirm this??)

    After a rethink, I am have thought "Why not use a margin loan to pay this out?" It will help with cashflow (from $450month to approx $112 a month - interest only), LVR would only be 30%. For the past year i have been considering a margin loan for my share purchases.

    Does anyone know if a margin lender will allow me to do this?

    I do not plan on repaying the loan on the shares so a margin loan would suit this purpose.

    Looking for comments from anyone in regards to this.

    Please pick it to pieces if you want -

  2. Nigel Ward

    Nigel Ward Team InvestEd

    10th Jun, 2005
    Hi Skatey and welcome to InvestEd!

    No doubt Mark and the NFS team will be able to guide you best. In particular, you should obtain financial advice from someone with an AFSL about whether the margin loan is appropriate for your circumstances.

    As a general principle though, I would have thought:

    1) deductibility of interest depends upon the use to which the loan is applied. In this case your personal loan and, if appropriate, margin loan will have been applied to purchase an income producing asset. Thus you would expect that the interest should be deductible. Your accountant can provide an definitive view based on your circumstances.

    2) the interest rate on a margin loan will probably be lower than your personal loan. - Always a bonus

    3) your margin loan will be interest only as you note so that's a double bonus of lower payments plus 100% of the payments will have the potential to be deductible. Whereas the principal component of repayments on your personal loan would not be deductible - only the interest component.

    4) you can assign across listed shares from your current sponsoring broker to your margin lender as security with a few forms to be signed. Note though that if you then want to trade in those shares typically you will need to do so through a third party sponsoring broker agreement (say with your original broker) and the fees for transactions will be much higher (because there's an extra step of them checking with your margin lender that it's okay to sell those shares...which now form part of the security held by the margin lender).

    Sorry to give generic commentary, but this is really one for our resident licensed financial advisers to consider in detail.

  3. Ol School Skata

    Ol School Skata Well-Known Member

    7th Nov, 2005
    As a follow up to this thread I started...

    I applied for and received a margin loan. Have used part of the funds to pay out a personal loan used to buy some shares approx 12 months ago (Balance approx $15200). This has reduced my cashflow from $450 month on the personal loan to about $105 month using the margin loan. Should have done this ages ago.

    I never wanted to pay the initial personal loan back so this is a great facility. Room in the budget now for servicing another property.