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Margin Loans save interest costs - use LOC to pay off ML?

Discussion in 'Finance & Banking' started by transit, 2nd Nov, 2007.

  1. transit

    transit Well-Known Member

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    The prospect of increasing interest rates has made me think of ways to reduce my interest bill. Do people think it's a worthwhile exercise to use a LOC (7.7%) to pay off my margin loan (9%)? My current ML has $47k drawn down @ 9% and my LOC has $177k drawn down @ 7.7% ($240k limit).

    It seems a no brainer that i can save 1.3% on my margin loan of $47k by using funds from the LOC to pay off my ML. I've just done the sums and 1.3% of $47k = $611. Ok, it's not a huge annual saving but i guess it's something plus i have consolidated all my debt.

    Is there anything i've missed or is this pretty obvious to others?
     
  2. DaveA

    DaveA Well-Known Member

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    nope its a good idea in general... however you may contaiminate the loan, so think about what the other money has been used for before completing the transaction..
     
  3. transit

    transit Well-Known Member

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    Thanks Dave, yes i should have mentioned that all funds from the LOC and ML are used for investing and therefore tax deductible.
     
  4. Rob G.

    Rob G. Well-Known Member

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    Just the possibility that your potential losses on the margin loan might be limited to the assets you used the funds to purchase (limited recourse). That may be the reason the rate is a bit higher.

    A LOC secured against your house makes any equity in the house at risk. That reduces the risk to the lender, and so they may charge less.

    Personal appetite for risk ...

    Cheers,

    Rob
     
  5. tailcat

    tailcat Well-Known Member

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    Opportunity!!!!!!

    Take the 47k (make it 50k) from the LOC and invest it!!!

    Assume a return of say 15%, then after paying the extra interest on the 50K at 7.7%, you will have made 7.3% on 50K = $3650. Now subtract the $611 you would have saved, this means you would be $3000+ ahead.

    Of course this all depends upon your risk factor.


    Tailcat
     
  6. DaveA

    DaveA Well-Known Member

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    and if you think 15% is reasonable..

    also for you example you should replace your 7.7% with his margin loan rate (as this would be wat he is actually making because the options are mutually exclusive....
     
  7. Glebe

    Glebe Well-Known Member

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    You've pretty much got it as far as I can tell. There isn't much use having an unused LOC, it's your cheapest debt.

    Some people use a LOC to provide the initial equity to their margin loan account, which is basically leveraging twice over.

    But you can get rid of your margin loan completely, get rid of any thoughts of margin calls and reduce your interest bill in the process.