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Margin Loans Multiple margin loans, capitalised interest.

Discussion in 'Finance & Banking' started by learning, 24th May, 2007.

  1. learning

    learning Member

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    Hello All,

    Is there any reason/benefits in setting up multiple margin loans? I am thinking of doing this with multiple managed funds, so that I can have one with conservative managed funds (funds with 7 year returns upto 10% year), one with growth funds (funds with 7 year returns of between 10% - 20%), one with high risk/agressive funds (geared funds/other funds with 7 year returns > 20%/30%), and leave my current margin loan and funds alone. I would set the gearing levels at a level that minimises the risk of a margin call occurring.

    Another reason why I wanted to do this was so that all the loans would not come cross collateralised. EG, if I were to have a margin loan with conservative funds combine with my geared/high risk funds, then if the geared/high risk funds fall sharply, that whole loan would be affected. Whereas, if I had seperate loans, only that geared/high risk fund loan account would be affected.

    At the moment, my margin loan is on a monthly variable interest rate. I cannot find a clear cut answer on capitalised interest and tax deductability. If I decide to setup the margin loan so that the interest is capitalised, is the capitalised interest 100% tax deductable? And what happens when you repay the capitalised interest on the loan? It just gets paid off and you don't claim the amount you repay on your tax return, or is this the time when you can claim it on your tax?

    Thanks




    Learning..............
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think you are making things overly complicated with your margin loans. The vast majority of people only use a single margin loan - there's rarely a reason to use multiples.

    As for your reasoning to keep them separate - I think you would be far better off to keep all your funds together so that if one fund dropped sharply, you are less likely to face a margin call because of the diversification you have via your other funds.

    Also - consider that the higher your loan, the greater the discount on interest you will receive ... can be more than 1% discount, which can be quite significant.

    When you capitalise interest, you are just taking money from another bucket to pay the interest costs. Normally you would take money from your own bucket to pay the costs, but with capitalised interest, you take it from your margin loan bucket. There is no difference in how you account for it - it is still an expense, it's just that your loan has grown as a result and you will pay more interest in the future as a result.

    You claim the interest when you incur the expense, regardless of which bucket the money comes from.

    Any repayments you make into your loan are capital payments and aren't tax deductible. It will decrease your loan balance, and thus decrease the amount of interest you pay (and claim) in the future.
     
  3. Simon

    Simon Well-Known Member

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    I'm with Sim. Sounds like you are making things harder for no real payoff.

    I have one ML with a mixture of funds and shares. I have never considered changing that until reading your post and I reckon I am happy to stick with one.

    Cheers,
     
  4. learning

    learning Member

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    When I first started out, I just picked the top 3 performing funds, and invested in those. I did not have a margin loan account at the time. I still remember the volatile times that happened after I had bought them, during 2000 - 2002. The CFS Global Share fund had a cool, gradual 40% fall in its unit price and eventually stopped paying dividends. At the moment, its making a nice slow recovery. The CFS Developing Companies Fund experienced a mild 10% fall in its unit price, and the CFS Future Leaders Fund had a nice 20% fall in its unit price.

    I'm slightly worried about the above happening again, and thus thought about creating multiple margin loan accounts. I have learnt my lesson from the above period in time, though. Diversify, pay more attention to what is happening, and manage my account better.

    A reason why you may want to do it is if you wanted to setup a margin loan account where you would contribute x amount of your money, borrow y amount of money, capitalise the interest, reinvest all dividends, and leave it as a set and forget investment. You would never add any money to the account unless you were made to pay off a margin call. In a way, if the returns were good, it would be like buying a positively geared investment property.

    You could take it a step further and continually increase your loan limit, without adding more of your own money to it. For example, you set up your margin loan account and borrow to a set LVR. Whenever your account doubles in size, you increase your loan limit, and then borrow/invest enough money from your cash buffer to reset the LVR to where it was originally.

    And then you could reduce your risks by setting up 3 accounts: a conservative, growth, and high risk/geared margin loan accounts.

    Anyway, they were just a few ideas I had, and am considering doing the above for myself. I am still trying to develop some financial goals for myself. If I feel comfortable, then I may do the above in order to help achieve my financial goals.
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think this is going to be far more useful to you as a strategy than running multiple loans.

    You need to assess your reasons for holding a particular fund - and then reassess regularly ... does it still meet your needs, is it still doing what you want it to ? If not - you should consider removing it from your portfolio and replacing it with something more appropriate.


    As previously mentioned - I disagree that this will reduce your risks - indeed, I believe that it will have completely the opposite effect - increasing your risks:

    1. a collection of conservative funds may not return enough to cover margin costs unless you are very conservatively geared. I believe a geared strategy requires average returns at least 2% over your borrowing interest rate (regardless of LVR).

    2. a high risk collection of funds will tend to be much more volatile, dramatically increasing the risk of margin call.

    Better in my opinion to marry the two together - match your conservative funds with your high risk funds, choose a modest LVR (50% ?) for the whole portfolio, and just let it go.
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Okay - now I'm going to contradict myself and suggest that there are some situations where multiple funds might be a good strategy.

    I suggest you look at the LVRs offered by each of the margin lenders you are considering - InfoChoice has a great LVR Lookup tool.

    Now, even if you don't intend to gear to the level that a margin lender will allow (I don't suggest you do - better to keep a larger buffer) ... by using a margin lender with a higher LVR, you automatically get a larger buffer.

    Eg. let's say you are geared to 50% LVR

    If lender A allows max 60% LVR with a 10% buffer, you'll face a margin call if the market drops 24.2%

    However if lender B allows max 70% with 1 10% buffer - the market would have to drop 35.1% before you'd face a margin call!

    So just by choosing a lender who offers the best LVRs will give you a much safer portfolio (assuming their interest rates and services are reasonable too).

    If you can get the best LVRs all with one lender - fantastic, that's the best result, but if not, perhaps consider a second lender ... but only if you can put at least 2 funds with them ... you need a bit of diversification for margin safety in my opinion.

    Just something to think about!
     
  7. coopranos

    coopranos Well-Known Member

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    The only times i can think multiple margin loans would be of any value would be as Sim said if you are particularly after a certain LVR that your current lender didnt have, or if you had already prepaid interest for a fixed amount but need access to more funds, and then another margin lender offers a better variable rate.
    Otherwise the argument of having multiple funds of varying "risk" held in different margin accounts makes no sense - if your more speculative portfolio takes a dive, then you will have to pull the margin call from the other accounts anyway. where the funds come from dont effect the risk of your investments in any way at all, only the actual return (depending on your gearing level and finance costs)
     
  8. learning

    learning Member

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    Hey Sim,

    While I am not scared to invest, or borrow to invest, I am a bit worried about putting one whole margin loan at risk buy bundling them all together.

    I would also love to capitalise the interest on my loan.

    But this is a golden point:

    If you can get the best LVRs all with one lender - fantastic, that's the best result, but if not, perhaps consider a second lender ... but only if you can put at least 2 funds with them ... you need a bit of diversification for margin safety in my opinion.

    Just something to think about!


    I need to really sit down, figure out my goals (numbers), do a bit more research and then invest ahead.
     
  9. coopranos

    coopranos Well-Known Member

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    Mate I think you are missing something in your logic - if all the margin loans are in your own name then it makes no difference to your overall risk. Each margin loan is not an island, they are all part of your portfolio.
    If you split it up into a few different margin loans, you are still going to cop a margin call if your LVR drops - and presumably you will have to pull the funds to pay the margin call from one of the lower LVR margin loans. Your own overall LVR will not change at all whether you have it in one or 27 margin loans.
     
  10. learning

    learning Member

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    I think I have gained a better understanding of what to do now, by reading and re-reading the posts below:
    1. Use my margin loan with a diversified portfolio of funds
    2. Pay more attention to what is happening with each of my managed funds
    3. Manage my funds better, selling when it looks like it is going to, or is, falling in value and relevance to my overall plans, and buying when they are going up, or look like they would be of value to my overall plans
    4. Put more focus on the actual type of margin loan to use, by example assessing its features/benefits, rather than setting up multiple margin loans.
    5. Watch my gearing
    6. Whether you have 1 or 100 margin loans, at any stage, 1 or all of them could be at risk at any one time. That is why you should apply the KISS principle

    In the short term, I plan to do the following:
    1. I won't go out and setup more margin loan accounts. Will stick with the one that I have at the moment
    2. I will regularily invest my money from my pay every payday into my managed funds account
    3. I will continue to borrow against my margin loan so that my LVR is always at or below 50%

    In the long term, I plan to do the following:
    1. Keep my eye on the features and benefits of other margin loans
    2. Keep on reading, learning and researching
    3. Continue to action my plans
     
  11. bundy1964

    bundy1964 Well-Known Member

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    Having a look around I did find ANZ Diversified Margin Loan which I may use as a 2nd loan as it gives better LVR's on mid caps and will take some species on which SGB/Banksa don't do.

    ANZ are scared to let you go over a mil but will lend money on the likes of EVE and ADN.
     
  12. learning

    learning Member

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    Too bad ANZ don't offer such a high LVR on managed funds. Their product looks good.