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Margin Loans Margin Loans - Ready to take the Plunge

Discussion in 'Finance & Banking' started by archangelsupreme, 6th Nov, 2007.

  1. archangelsupreme

    archangelsupreme Well-Known Member

    Joined:
    7th Sep, 2007
    Posts:
    206
    Location:
    Australia
    Ok, I think i'm ready to take the plunge into margin loans (for managed funds at this point).

    Though I still have some remaining questions I would like cleared before I do. Mostly operational questions.


    1) Existing Portfolio

    If I've got an existing portfolio of managed funds worth say $10k. If I use all of this as security for the margin loan and go for an LVR of around 50%....this means I can borrow another $10k giving me a total portfolio of $20k. OK Got that.

    Q. Though how do I draw upon the $20k??????? and how is the interest calculated if I don't draw upon the entire amount??? Will I still have to pay interest on the whole $20k regardless of how much I use.

    Also If i choose to go with CommSec (most likely because I hope to use their share trading facility soon)....do i need to transfer my existing portfolio to them or something (i.e. use them as a broker)? If not, then how will they know the value of my portfolio at any point in time in order to determine the value of my portfolio and when to issue a margin call...

    In other words, do i need to use CommSec as a broker or can I used the drawn down funds (presumebly deposited to my bank account) and invest through sombody like an InvestSmart in order to say on contribution fees...etc.

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    2) Using the margin loan to invest in many things

    Can i use the one margin loan to invest in many managed funds? I've got units in both Macquarie Small Companies Growth Trust and BT Imputation Fund and want to use part of the $20k to invest in each (say $8k each for a total of $16k in managed funds)

    If this is possible, how then would that factor into the LVR calculation and margin calls etc...

    In the near future I also want to use the remaining part of the $20k (i.e. $4k) to invest in direct shares...is this possible in the one margin loan?

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    3) Interest - Fixed or Variable?

    Do you recommend going fixed or variable in today's environment? Commsec currently offers 9.25% variable while fixed is 8.95% for less than 1 year term or 9.15% for 1 to 5 year term.

    One would ideally go for the fixed option right with the looming rate rise? What's the catch and what does it mean by prepaid interest....do I need to pay this upfront like say a whole year's worth of interest right at the start???

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    4) Is CommSec really the best option for me?

    It's not the best rate out there, 9.25% variable as oppose to NAB which offers 9.15% and BankQueensland at 8.95%??

    Though i'm kind a swayed a bit to CommSec because I think that i'll be using their OnlineTrading facility anyway and might as well pay that extra little bit of interest (tax deductible anyway) for the benefit of covenience and an all in one facility???? I currently have a transaction account with the CommBank as well.

    Thanks for your help.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
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    Location:
    Sydney, Australia
    Depends on the lender ... some lenders actually have a minimum of $20K (LevEq recently increased theirs to $50K :eek: ). You can borrow less, but they'll charge you interest on the full amount ... very bad. Make sure you check this out when choosing a margin loan.

    What happens is that you'll be given a margin limit based on the value of the assets you provide as collateral.

    You need to look at the maximum LVR that the various lenders will offer on your current portfolio.

    Let's say they will offer 70% LVR on all your funds. This means that your $10K will get you a margin limit of $7,000 ... meaning that you can draw down $7,000 of cash from the margin loan (for whatever purpose) before reaching your limit.

    Now, if you choose to invest that money, you'll also get additional margin for the new investments you make. Let's say each of the funds you want to invest in is also at 70% max LVR, so this $7000 draw down will get you (up to) another $23,333 worth of these investments ... $7000 / (1 - max_LVR).

    Okay, you've decided you only want to borrow up to 50% LVR, what will happen is that you simply ask the lender to invest another $10K in whatever investments you want (assuming max LVR of those investments is greater than 50%), and instruct the lender to fund those investments from your margin loan. They'll simply write a cheque and send it off to the fund manager on your behalf (you'll probably have to send the lender a completed application form first, they'll sign it and add the cheque before sending it in). You then have $20K invested and a $10K loan = 50% LVR.

    Assuming your funds are still all at 70% max LVR, you now have a max loan limit of 70% * $20K = $14K ... and you've only borrowed $10K ... so you have a $4K buffer. You can either invest this, draw it out as cash, or leave it there as a buffer (I suggest you leave it !!!).

    Make sense ?

    Yes, you will need to do a transfer to them - it's straight forward, and you'll probably find the necessary form included with the margin loan application form ... if not, it will be available from their website. Remember that the funds will no longer be in your name ... they will be (depending on how the loan is structured - some do it differently) in the name of your margin lender as nominee for you as the investor. It all looks more complicated than it really is ... but just remember that all transactions and communication with the fund manager go through your margin lender.

    You'd need to discuss with your margin lender as to how you go about investing in additional funds via a third party fund provider like InvestSmart ... they'll tell you if that is possible and what you need to do.

    Yes, you'd normally do it all through the one margin loan.

    You need to find out the maximum LVR offered by your lender for each of the funds - and then you can work out your margin limit and your buffer for margin calls.

    I'm assuming you've read my article How margin loans work[/url] ? It's a bit complicated, but it explains the mathematics behind it all.


    Prepaid interest is literally that ... you pay in advance.

    You'd generally only want to do that towards the end of financial year so you can bring part (or all) of next year's interest payments forward into this year and give yourself a larger tax deduction. Now the ATO does let you do this, provided you aren't only doing it for the tax dodge ... you must be getting some other benefit from the transaction, such as a discounted interest rate (usually they'll knock 0.05% or so off the rate).

    You don't have to pre-pay an entire year, but I'd only do it for the tax benefits, since the discount you get is actually not worth enough (in fact, the time value of money shows that you'll probably be worse off after inflation by doing so!!).

    I don't have a recommendation for fixed vs variable ... I prefer flexibility, so I generally leave my loans variable (fixed loans can't be refinanced or restructured easily). You may prefer certainty with your payments, so fixed might be better for you.

    It's entirely up to you.

    You need to check the LVRs being offered by the various lenders for the funds and shares you currently have and the ones you are thinking about getting in the future. Not all lenders offer good LVRs ... indeed some of them are rubbish!

    St.George and Suncorp generally offer very good LVRs, LevEq is good although slightly more conservative (but minimum loan size is probably too high for you).

    I haven't looked at BoQ or Commsec recently, but when I was first researching a while back, I found that Commsec were near the bottom of the list (that may have changed).
     
  3. archangelsupreme

    archangelsupreme Well-Known Member

    Joined:
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    Location:
    Australia
    Thanks Sim, I really appreciate your explanation and the level of detail you put into the response.

    It has really helped me understand the overall picture. I haven't fully read your margin loan guide yet...didn't know one existed until a momment ago...so will be reading that (over the next couple of days...LOL, looks very detailed and complicated on first viewing).

    I'm surprised though that CommSec is not recommended by yourself, judging from what i've read on these forums, people say CommSec is good.???
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
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    Location:
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    I'd only recommend them if I had used them myself, or researched them thoroughly enough to be confident that they would be reasonable.

    As I said, my original research (several years ago) showed them to be less than desirable.

    ... that being said, I just checked the LVRs of the funds on my watchlist again and they are actually quite good - up there with St.George and Suncorp. Competition must be driving them to be much more competitive.

    There are one or two funds that LevEq offer LVR on that Commsec don't ... so for my current portfolio, Commsec would not be suitable.

    Commsec's interest rates are pretty good compared to LevEq right now ... but I'm paying substantially less than the headline rate for LevEq, so I'd need to see how far Commsec were willing to drop before I considered moving. This is not an issue for you yet ... you'll usually need at least $250K of loan before you can start negotiating rates (depends on the lender).

    Overall, it looks like Commsec is a lot better than when I first looked at them a couple of years back ... good to see - I'm always happy to see more competition in lending products!

    Note that Commsec have a minimum $20K loan size, unless you are using their regular gearing option ... so this might be an issue for you.
     
  5. archangelsupreme

    archangelsupreme Well-Known Member

    Joined:
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    Location:
    Australia
    I think most Margin Lenders have a minimum of $20k anyway....so will probably go for starting limit around $20k-$30k just to start.
     
  6. vandalic

    vandalic Active Member

    Joined:
    2nd Jan, 2007
    Posts:
    35
    Location:
    Brisbane, QLD
    In my opinion, look past rates and LVR (they aren't that much different) and focus on user experience, functionality and customer service.

    Some margin lenders are loaning through other companies so getting into your margin account and buying shares can be a pain in the butt as they are not fully integrated i.e. Westpac.

    PS. I'm with Commsec