# Margin loan vs. LOC



## transit (6 January 2007)

Hi all, total n00b here with my first post 

Why do people use a margin loan? Is it mainly because they don't have or can't access a Line of Credit (LOC)? My commsec margin loan is 8.9% but my LOC is 7.42%. It seems to me that i'd be much better off using the LOC instead of the margin loan. Not only do i save about 1.5% in the interest rate but i also avoid the $10 transaction fee that commsec charges each time. Is that blindingly obvious to others or have I missed something?


Also, do people think it's extra risky using a LOC to buy shares and then giving them to a margin lender (eg commsec) to then use as security for a margin loan? I guess this would be like doubling up on your gearing?


Also, is it possible to use a margin loan to buy stock and then margin loan against it again? EXAMPLE: Say i have given some managed funds to commsec as security and get a margin loan for $30k. I then buy 1,000 BHP shares at $25 which means my margin loan is now in arrears for $25k. But because these BHP shares are being held by commsec as security, does that mean i can then borrow 70% of the value of those BHP shares being an extra $17,500 (25000 * 70%)?


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## moses (6 January 2007)

*Re: margin loan vs LOC*



			
				transit said:
			
		

> Hi all, total n00b here with my first post
> 
> Why do people use a margin loan? Is it mainly because they don't have or can't access a Line of Credit (LOC)? My commsec margin loan is 8.9% but my LOC is 7.42%. It seems to me that i'd be much better off using the LOC instead of the margin loan. Not only do i save about 1.5% in the interest rate but i also avoid the $10 transaction fee that commsec charges each time. Is that blindingly obvious to others or have I missed something?



You could be using both; ie, use the LOC to increase your margin loan to increase your share holdings to improve your gains (assuming thats what you want to do and don't mind the risk). After all, your LOC can be spent on anything you like; a car, a holiday, anything wasteful, so far far better to put it on an investment like shares.


> Also, do people think it's extra risky using a LOC to buy shares and then giving them to a margin lender (eg commsec) to then use as security for a margin loan? I guess this would be like doubling up on your gearing?



Yes, its extra risky, but a perfectly normal thing to do for ambitious investors, and less risky than spending your LOC on a car or a holiday. Your LOC is presumably backed up by an asset (property?) and the shares are an asset in themselves, so its not ridiculous to exploit them both to the max. At the end of the day, if you don't take risks and double your leverage somehow it is difficult to get ahead.


> Also, is it possible to use a margin loan to buy stock and then margin loan against it again?



Not until the stock increases in value.

But if you use your LOC to buy stock, you can increase your margin loan (or get another ML) against said stock. As I said before.

Example, when my home was revalued and the bank increased my LOC making $50k available, the bank actually suggested I use the $50k to support a margin loan of $100k, meaning I could buy $150k of shares with my $50k.

In fact I didn't because I wanted to try my own hand with speculative stocks (which the bank wouldn't margin lend against). I'm glad I didn't because it was just before the May correction, and it was bad enough unleveraged.

So far as leverage is concerned, my decision to trade shares was really about creaming off enough profit to pay the interest on my property loans. Thats all it has to do, and ironically I've borrowed to the hilt on everything I have but my shares. But lots of short term trades making approx 5-20% per month to cover my interest payments means I get to buy and develop property for free.

Creating wealth out of nothing is what I call leverage.

But don't take my insane ramblings as advice.


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## Fab (6 January 2007)

*Re: margin loan vs LOC*



			
				transit said:
			
		

> Hi all, total n00b here with my first post
> 
> Why do people use a margin loan? Is it mainly because they don't have or can't access a Line of Credit (LOC)? My commsec margin loan is 8.9% but my LOC is 7.42%. It seems to me that i'd be much better off using the LOC instead of the margin loan. Not only do i save about 1.5% in the interest rate but i also avoid the $10 transaction fee that commsec charges each time. Is that blindingly obvious to others or have I missed something?
> 
> ...




Where do you get a LOC at 7.42% I am with Commsec and mine is charged at 7.57%


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## Fab (6 January 2007)

*Re: margin loan vs LOC*

Sorry I meant to say I am with CBA instead of Commsec.


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## tech/a (6 January 2007)

*Re: margin loan vs LOC*

Agree with Moses.

Using your LOC your actually borrowing back your own equity and being charged for the advance.
Margin funds are bank funds--other peoples money.

These are the best funds in my view to get a hold of.
As a friend once said.

If you have a consistent way of returning 20% a year and you can borrow funds at 8%---why wouldnt you find every cent you could get your hands on and borrow a squillion.

*Why wouldnt you???*

Dont forget you can use partial LOC funds to start your Margin account.

Oh on the point of interest rates.
If your having an issue with 1% interest difference you shouldnt be trading leverage.
1% on 100k is $1000 over a year.
You'll be playing with those amounts daily.


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## Fab (6 January 2007)

*Re: Margin loan vs LOC*



			
				transit said:
			
		

> Hi all, total n00b here with my first post
> 
> Why do people use a margin loan? Is it mainly because they don't have or can't access a Line of Credit (LOC)? My commsec margin loan is 8.9% but my LOC is 7.42%. It seems to me that i'd be much better off using the LOC instead of the margin loan. Not only do i save about 1.5% in the interest rate but i also avoid the $10 transaction fee that commsec charges each time. Is that blindingly obvious to others or have I missed something?
> 
> ...




Transit,

Where did you get a 7.42% LOC rate sounds very good and how big was your LOC ?


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## transit (6 January 2007)

*Re: margin loan vs LOC*

Thanks for the reply moses. You've reassured me that i'm not being too aggressive in using the LOC to buy shares and then transferring them to my commsec account to margin loan against. I guess leveraging this way requires extra protection of capital through tight stop losses etc because if the shares tanked, i'd be wiped out on both my margin loan AND LOC - a double whammy.

In order to keep things clean from an accounting perspective, my LOC is only used for investing (servicing investment property outgoings and buying shares). To keep the tax office happy i don't want to mix deductible and non-deductible debt, so i won't be using the LOC for anything like a car, holiday, plasma TV etc. Yes the LOC is secured by property.

Moses you also mentioned using your profits to help with your negative gearing on your investment properties. This is exactly what i want to do as my property has a shortfall between the rent received and the outgoings (interest repayments, council rates, body corp etc). I prefer property as it's been good to me but have only recently started getting into shares as i got burnt a bit in the past.




			
				moses said:
			
		

> You could be using both; ie, use the LOC to increase your margin loan to increase your share holdings to improve your gains (assuming thats what you want to do and don't mind the risk). After all, your LOC can be spent on anything you like; a car, a holiday, anything wasteful, so far far better to put it on an investment like shares.
> .....
> Yes, its extra risky, but a perfectly normal thing to do for ambitious investors, and less risky than spending your LOC on a car or a holiday. Your LOC is presumably backed up by an asset (property?) and the shares are an asset in themselves, so its not ridiculous to exploit them both to the max. At the end of the day, if you don't take risks and double your leverage somehow it is difficult to get ahead.
> .....
> So far as leverage is concerned, my decision to trade shares was really about creaming off enough profit to pay the interest on my property loans. Thats all it has to do, and ironically I've borrowed to the hilt on everything I have but my shares. But lots of short term trades making approx 5-20% per month to cover my interest payments means I get to buy and develop property for free.




Can you please explain this. I thought that margin lenders only go to a max LVR of 70%. Example, i have $25k of BHP unencumbered. I transfer them to commsec as security for a margin loan and they give me 70% of it's value which is $17,500 as a margin loan. How do you get 2 x the loan of your security ($50k security which the bank gives you another $100k making $150k in total)?



			
				moses said:
			
		

> Example, when my home was revalued and the bank increased my LOC making $50k available, the bank actually suggested I use the $50k to support a margin loan of $100k, meaning I could buy $150k of shares with my $50k.


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## transit (6 January 2007)

*Re: margin loan vs LOC*

Tech/A, i'm not sure what you mean by this as a LOC is also the bank's funds, same as a margin loan. I realise with the  LOC that i'm borrowing back my equity but it's still the bank's money. The only other way is to sell the property to get access to the equity (and pay CGT, agent's fees etc). If i have equity in an investment property (IP), it's lazy dollars sitting there not doing anything. Example, someone who owns a house worth $1m fully paid off has a lot of lazy money not working for them. Using a LOC against that equity allows them to leverage that equity.




			
				tech/a said:
			
		

> Agree with Moses.
> 
> Using your LOC your actually borrowing back your own equity and being charged for the advance.
> Margin funds are bank funds--other peoples money.
> ...




I totally agree that borrowing money at 8% and getting a 20% return is the way to do it. Making money out of the difference in rates is what it's all about   



			
				tech/a said:
			
		

> If you have a consistent way of returning 20% a year and you can borrow funds at 8%---why wouldnt you find every cent you could get your hands on and borrow a squillion.
> 
> *Why wouldnt you???*




Can you please explain how this is done? Are you talking about depositing say, $50k of LOC funds to establish a margin loan? So then i buy $50k of BHP and then use that security to borrow another 70% of it's value, i.e. $85k ($50k + $35k)?



			
				tech/a said:
			
		

> Dont forget you can use partial LOC funds to start your Margin account.




Good point, although the interest adds up if i intend to buy something for a long term hold.



			
				tech/a said:
			
		

> Oh on the point of interest rates.
> If your having an issue with 1% interest difference you shouldnt be trading leverage.
> 1% on 100k is $1000 over a year.
> You'll be playing with those amounts daily.


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## Sir Burr (6 January 2007)

*Re: margin loan vs LOC*



			
				transit said:
			
		

> To keep the tax office happy i don't want to mix deductible and non-deductible debt,



I use my homeloan LOC and keep track of the amounts I withdraw, the date of withdrawals and track any interest rate changes. It's easy to workout the interest charged on these amounts using a spreadsheet and the tax office is happy with that! 

If your homeloan is in 2 names you may have to reduce the interest on LOC for trading in half. My HL is in 2 names so can only claim 1/2 of the interest cost.

I once worked out the difference in interest between claiming 1/2 the interest from my HL LOC and getting a margin loan (ML being able to claim the whole interest costs). Seeing the margin loan interest is more expensive than the LOC, there wasn't much difference in it and is easier just to redraw the LOC than worry about the extra stuff that goes with Margin Loans.

SB


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## transit (6 January 2007)

*Re: Margin loan vs LOC*

Hi Fab, my LOC is also with CBA. From memory, they gave me .15% off the standard rate (on my LOC and IP loan) because they made an error with the redraw on my loan. The LOC is only for $20k. In my first post i meant to say 7.73% which is the rate on a different LOC ($80k) that i have with Mac bank. It's a low doc loan, hence the bigger rate of interest.



			
				Fab said:
			
		

> Transit,
> 
> Where did you get a 7.42% LOC rate sounds very good and how big was your LOC ?


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## transit (6 January 2007)

*Re: margin loan vs LOC*

SB, i would be careful going down this road because if you are ever audited you might find the ATO could disallow your interest as a deduction if you have also used it for private stuff. I assume you're talking about a redraw, not a draw down on a LOC which you have attached to the HL? If it's a LOC remember that the ATO consider every withdrawal as a new loan.

Instead of tracking the interest separately, wouldn't it be easier to use a split loan which has it's own account number? So anything investment related is taken from the sub account and totally deductible.



			
				Sir Burr said:
			
		

> I use my homeloan LOC and keep track of the amounts I withdraw, the date of withdrawals and track any interest rate changes. It's easy to workout the interest charged on these amounts using a spreadsheet and the tax office is happy with that!




If your LOC is also in the same 2 names as on the HL, then i'd think that both people would have to declare everything 50%? You claim half and the missus also claims half? However if the shares were bought in your name only then you'd be entitled to claim the full 100% of the interest on the LOC as long as you're also declaring the income 100% in your name only.



			
				Sir Burr said:
			
		

> If your homeloan is in 2 names you may have to reduce the interest on LOC for trading in half. My HL is in 2 names so can only claim 1/2 of the interest cost.
> 
> I once worked out the difference in interest between claiming 1/2 the interest from my HL LOC and getting a margin loan (ML being able to claim the whole interest costs). Seeing the margin loan interest is more expensive than the LOC, there wasn't much difference in it and is easier just to redraw the LOC than worry about the extra stuff that goes with Margin Loans.
> 
> SB


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## cornyco (6 January 2007)

*Re: Margin loan vs LOC*

hi all.my first time in.transit if you have 25k in equity/shares the bank will loan you $58,333.your portfolio will be worth $83,333.the breakup is 30% equity and 70% debt not 70% of the 25k regards bill


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## Sir Burr (6 January 2007)

*Re: margin loan vs LOC*



			
				transit said:
			
		

> SB, i would be careful going down this road because if you are ever audited you might find the ATO could disallow your interest as a deduction if you have also used it for private stuff. I assume you're talking about a redraw, not a draw down on a LOC which you have attached to the HL? If it's a LOC remember that the ATO consider every withdrawal as a new loan.




"Careful going down this road", "Disallow" haha? Like I said it's withdrawn for TRADING, I never even mentioned it was for private use   . If the tax audited me they can see the transactions on statements through to my trading account. My accountant rubber stamps it, the statement records and the way I have calculated it.



> Instead of tracking the interest separately, wouldn't it be easier to use a split loan which has it's own account number? So anything investment related is taken from the sub account and totally deductible.




Can't be bothered to have separate accounts - it's too easy for me especially since the redraw/deposit back happens infrequently. 



> If your LOC is also in the same 2 names as on the HL, then i'd think that both people would have to declare everything 50%? You claim half and the missus also claims half?




Yes if the trading account is in 2 names and the HL account is in the same 2 names.



> However if the shares were bought in your name only then you'd be entitled to claim the full 100% of the interest on the LOC as long as you're also declaring the income 100% in your name only.




If the trading account is in my name only and the HL is in my name AND spouse then you can only claim 50% of the interest charged on the amount you withdraw for trading.

SB


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## lesm (6 January 2007)

*Re: margin loan vs LOC*



			
				transit said:
			
		

> SB, i would be careful going down this road because if you are ever audited you might find the ATO could disallow your interest as a deduction if you have also used it for private stuff.



If you are using a loan for mixed purposes, private and business (income earning) related, you need to clearly delineate between the two types of usage.

The interest paid on the income earning component is tax deductible. With a heavily used LOC this may become an onerous process, as you need to ensure that the differentiation is maintained.

The ATO may disallow the claim if you cannot substantiate it in the first instance, let alone waiting for an audit to occur.

Separating loans to maintain a clear split between private and business (income earning) usage is the simpler approach, as there is a clear delineation.

On matters like this, people should seek the advice of an accountant or they can contact the ATO for advice, if they are not sure on the actual tax position.

Cheers.


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## transit (6 January 2007)

*Re: Margin loan vs LOC*

Thanks cornyco, i think i get it now   



			
				cornyco said:
			
		

> hi all.my first time in.transit if you have 25k in equity/shares the bank will loan you $58,333.your portfolio will be worth $83,333.the breakup is 30% equity and 70% debt not 70% of the 25k regards bill


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## transit (6 January 2007)

*Re: margin loan vs LOC*



			
				Sir Burr said:
			
		

> "Careful going down this road", "Disallow" haha? Like I said it's withdrawn for TRADING, I never even mentioned it was for private use   . If the tax audited me they can see the transactions on statements through to my trading account. My accountant rubber stamps it, the statement records and the way I have calculated it.SB




The private use i'm talking about is for your PPOR which is non deductible debt. It sounds like you've got it sussed but as lesm mentioned:



			
				lesm said:
			
		

> Separating loans to maintain a clear split between private and business (income earning) usage is the simpler approach, as there is a clear delineation.




RE: the ATO disallowing income earning debt as a deduction if it was mixed with private debt, i believe there was a recent court case where the TOTAL interest bill was not allowed as a deduction. It was mentioned on the somersoft site, i just did a search but can't find it now. But as you mentioned, if you can clearly make the distinction and itemise each trade with the interest incurred, you may not have a problem.


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## Sir Burr (6 January 2007)

*Re: margin loan vs LOC*



			
				transit said:
			
		

> RE: the ATO disallowing income earning debt as a deduction if it was mixed with private debt, i believe there was a recent court case where the TOTAL interest bill was not allowed as a deduction.



Transit, that reminds me of a post somewhere recently where it was  mentioned that you can claim Foxtel if you have Bloomberg. Yes you can but if it is one of ten channels, you can only claim 1/10 of the Foxtel cost.

From the ATO:

_Where the loan was also used for private purposes, you will be able to claim only interest incurred on that part of the loan used to acquire the shares._ 

SB


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## rozella (6 January 2007)

*Re: Margin loan vs LOC*

G'day transit,

you said


> Can you please explain how this is done? Are you talking about depositing say, $50k of LOC funds to establish a margin loan? So then i buy $50k of BHP and then use that security to borrow another 70% of it's value, i.e. $85k ($50k + $35k)?



If you borrowed $50,000 of LOC funds to purchase BHP on a margin loan, then you could buy $200,000 of BHP if you want (maximum), as most marginlenders have a LVR of 75% on BHP....then with most marginlenders you will have a further buffer of $20,000 (10% of current price) before you would have a margin call.......10% is a big drop.

However, it would be unlikely that you would put all your eggs in the one basket, so if it was me, with the $50k LOC money, I would probably gradually buy 10 stocks as opportunities arise with an average LVR of 70%, so my total stockholding would be 10 x $16667 = $166667  .....buffer $16667 plus the balance of different stocks, then each time your portfolio rises $5000 you can purchase another $16667 stock.....provided it rises of course.  Your buffer also continues to increase as stocks rise.

rozella


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## transit (8 January 2007)

*Re: Margin loan vs LOC*

Thanks rozella, i think i understand now... or maybe i don't   

When i set up my margin loan i transferred $50k worth of mananged funds as security and applied for a margin loan limit of $30k.

Could i have applied for a larger margin loan? I thought that the margin loan limit would be determined by the LVR of the security. So if i lodged $50k of security (and they have a max LVR of 70%), my max loan limit would have been $35k (50k * 70%).

Or am i working out the LVR wrong?

If that's the case, i think i'll be calling commsec tomorrow and see if i can increase my margin loan.

cheers



			
				rozella said:
			
		

> G'day transit,
> 
> you said
> 
> ...


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## moses (8 January 2007)

*Re: Margin loan vs LOC*



			
				transit said:
			
		

> Thanks rozella, i think i understand now... or maybe i don't
> 
> When i set up my margin loan i transferred $50k worth of mananged funds as security and applied for a margin loan limit of $30k.
> 
> ...




Yes, you're wrong, which is good for you   

Commsec will loan you 70%, you provide 30%.

That means Commsec will loan you $116k on your $50k, and you can buy $166k worth of shares.


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## rozella (9 January 2007)

*Re: Margin loan vs LOC*

G'day transit,

Just think of a margin loan as another word for a real estate loan......it is done the same way except the lender has different lending ratios for each stock which is available on their list.

If you wanted to buy a house & you had $50,000, then the lender would probably lend you the balance at 80% of valuation.  i.e. your deposit would be $50,000 & you could purchase a house worth $250,000.  If the value went up substantially & you saved a bit more, then you may want to buy another house, so then both houses are revalued to see whether your equity would be sufficient to do the deal.

Marginlending is the same, if you have $50,000 (nomatter whether it came from LOC or savings), you could buy $166,666 of stocks provided they averaged a LVR of 70%, & as they go up in value, you will have addional equity to buy more.  Margin loans are normally open ended, meaning no limit to the borrowed amount provided that the equity is there.


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## transit (13 January 2007)

*Re: Margin loan vs LOC*



			
				moses said:
			
		

> Yes, you're wrong, which is good for you
> 
> Commsec will loan you 70%, you provide 30%.
> 
> That means Commsec will loan you $116k on your $50k, and you can buy $166k worth of shares.




Thanks Moses, that sounds much better 
My confusion was with the way the LVR is calculated. I had $45k of MF's transfered to them and i thought i could get a margin loan of max $30k (based on 70% of 45k).  So i called commsec and asked the guy about increasing my margin loan. He said no worries and i've now increased it to $150k   



			
				rozella said:
			
		

> G'day transit,
> 
> Just think of a margin loan as another word for a real estate loan......it is done the same way except the lender has different lending ratios for each stock which is available on their list.
> 
> ...




Thanks for the great explanation rozella. As mentioned, my maths suck! Now i finally realise the formula is 50k * 70% = 35k; and the 35k / 30% = $116k.

Cheers for helping the n00b through this basic exercise


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