# Investment Loans for Shares



## Bhenn (21 August 2009)

My basic situation is this:

Have a personal loan owing $13,500 or so that I used to get my portfolio up and running.

Believe we're about to see a retraction in some areas and am keen to accumulate in some of my bluechips (BHP, WBC, ANZ), whilst also adding some potential for growth with companies perhaps like Bluescope Steel, Arrow Energy, and others.

Need capital and because I am not interested in buying a house for some time (I'm 20), I want to really give the stock market a shake for a few years and see where it takes me with a hopeful recovery by diversifying in quality and potential.

So...where to get that capital (looking at potential loan of $65K or so - so I can pay out my existing loan and then invest 50K)? I don't really fancy paying 13% or higher with a personal loan of $65K over 7 or so years (interest would be huge plus would eat away at any potential profits)...so what other options do I have?

I have read up a bit on margin lending and believe I have quite the appetite for risk, but is there any other products that are tailored for share investing and offer a lower interest rate? Macquarie Bank have one called GEI+ where you borrow for a set number of years, pay interest and then basically sell at a specified date, pay them back the captial whilst you keep the profits, but it doesn't allow for flexibility to trade...etc.

Is a personal loan the only way to go if I want complete control of my portfolio and its decisions...whilst paying back the loan amount as a means of savings?

Any help or advice would be greatly appreciated. 

Thanks everyone!


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## boofhead (21 August 2009)

It's a risk. Have you looked at the full costs and then calculated what will happen if things go bad? You could have much larger debts that can hurt you for some time. Only risk what you can afford to lose.


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## So_Cynical (21 August 2009)

Sounds like an "interest only" investment loan is what u require...unfortunately most lenders will require some property as security for the loan.

Members equity for example http://www.membersequitybank.com.au/personal/home_loans/investment_loan.html


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## jono1887 (21 August 2009)

why dont you just get a margin loan? the interest is cheaper and the interest is tax deductible (not sure if this is the case with personal loans used for investments)


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## drsmith (21 August 2009)

Bhenn said:


> My basic situation is this:
> 
> Have a personal loan owing $13,500 or so that I used to get my portfolio up and running.
> 
> ...



A loan secured against residential property will generally be cheapest. Margin lending is next and the cost of personal loans is higher again. 

With margin lending the maximum you can borrow is related to the value of the share portfolio and can hence rise and fall. The risk here is that you may be forced to sell into a falling market to maintain debt to equity ratio within an acceptable limit (typically 70%) so this is not an option if you only have a small amount of initial capital or shares.

Macquarie Bank GEI+ is a protected equity arrangement whereby you purchase the underlying shares and put options to protect the capital value for the duration of the put option. The ongoing cost of this arrangement is the loan interest plus the cost of the put option and is therefore high. You may also not be entitled to imputation credits from dividends under this arrangement as the underlying shares have to be held for 45+ days at risk (without the put option) to gain entitlement to the imputation credits.


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## Bhenn (22 August 2009)

Thanks everyone. Okay, so I guess I still have a bit of research to do. Perhaps it's time to talk to some professionals!


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## Tysonboss1 (5 September 2009)

I think a margin loan is defiantly the way to go.

based on your current portfoilio ( I am guessing it's over $15,000 ). you should be able to borrow up to $45,000 depending on what your existing stocks are and which ones you wish to buy.

I would keep your existing personal loan and just smashed out the repayments as fast as you can. $13,000 isn't that much you should be able to clear it in a year or so if you really try.

One trap young investors fall into when using debt to start their portfolio is only paying of the minimum amount each month off their debt, end up spending the remainder of their income on lifestyle.

At your age you should try and put a minimum of 30% of your weekly pay towards investing. So if your earning $500 a week put aside at least $150. If your repayments are only $100p/w then pay the extra $50 of the principle, and every few months redraw those funds and purchase more assets.


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## Julia (5 September 2009)

Tysonboss1 said:


> I think a margin loan is defiantly the way to go.
> 
> based on your current portfoilio ( I am guessing it's over $15,000 ). you should be able to borrow up to $45,000 depending on what your existing stocks are and which ones you wish to buy.
> 
> I would keep your existing personal loan and just smashed out the repayments as fast as you can. $13,000 isn't that much you should be able to clear it in a year or so if you really try.



Borrow $45,000 on the above basis?   We have no information as to the OP's overall financial situation, i.e. capacity to repay if the market falls over.
Are there any other assets?
Seems very risky to me.


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## rock86 (5 September 2009)

I'm curently only a grad accountant, and am no lending expert. Just wated to state that n matter which way you head, all interest paid that is used for investing is tax deductible. The only thing that will differ is the interest rates on your investment loan/margin lending and therefore repayments.


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## explod (5 September 2009)

Are you experienced in share trading?

Most of the comapnies you mention on post one retracted an average 40% in last Octobers crash.  BHP went from near $50 down to $22, ANZ from 32 to 13. And those types of stocks are the ones a lot of financial advisers would put you onto.

I went through two financial advisers in high profile companies till I learnt the best adviser is yourself, but that is a hard long road, but IMHO the only way for long term success.   There are some very good traders on ASF who you can learn about, and from, over time but a lot of research and learning first.

If you must learn do it with a small amount of capital, but to grab 50 grand and expect to go to the moon is dreaming for the novice and even sometimes for us more experienced,

just my 2 cents because it is my view that the last October crash could well repeat again soon, may not, but it is very risky at the moment.


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## Tysonboss1 (6 September 2009)

Julia said:


> Borrow $45,000 on the above basis?   We have no information as to the OP's overall financial situation, i.e. capacity to repay if the market falls over.
> Are there any other assets?
> Seems very risky to me.




I don't think it's risky,

Offcourse he has to make his own choice to suit his situation, 

How ever the interest would only be less than $3500 per year at 7.25%, and he would also be getting some where between 4% and 10% in dividends to help cover that.


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## Tysonboss1 (6 September 2009)

explod said:


> If you must learn do it with a small amount of capital, but to grab 50 grand and expect to go to the moon is dreaming for the novice and even sometimes for us more experienced,
> 
> just my 2 cents because it is my view that the last October crash could well repeat again soon, may not, but it is very risky at the moment.




It's also risky to waste to much time pushing "nickels and dimes" around. you have to have scale in your portfolio and in the begining it is handy to use debt to help scale up.

As I said though don't rely on debt, pump as much of your own capital in on a regular basis to help grow quicker and secure you position and lower your lvr.

Two things to think about,

" Debt is like fire, using it correctly will improve your standard of living 100 fold, Using it incorrectly will burn your house down"

" Debt is a lever that will help you move big things quicker, But choose a lever thats to big and it will snap in the middle.


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## jet328 (6 September 2009)

Read the Storm Financial thread
Then read it again
Then comeback with questions


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## drsmith (6 September 2009)

To me, two things are a requirement when it comes to the use of margin lending.

1) Conservative gearing.
I would never gear a margin lending facility beyond 50% and typically not beyond a third. This leaves a reasonable buffer in case of a significant market correction.

2) Strong cash flow to be able to reduce debt relatively quickly.
This is to minimise the risk of margin call in a sustained and deep bear market. A bear market fall of 50% or more will wipe out most or all the equity associated with a margin facility geared to 50% leaving the investor with only a small fraction of his initial investment or nothing depending on the pace of the fall.

The bear market to March this year would have seen portfolios geared to a third face margin calls if there wasn't sufficient cash flow to reduce the underlying debt.

In terms of the initial poster's situation a margin lending facility is neither viable due to insufficient initial collateral nor practical as he has borrowed for the shares that would be used as collateral in the first place.


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## Tysonboss1 (6 September 2009)

drsmith said:


> In terms of the initial poster's situation a margin lending facility is neither viable due to insufficient initial collateral nor practical as he has borrowed for the shares that would be used as collateral in the first place.




I don't agree, His initial investment has probally grown and the initial loan should have shrank, so he should be a good position.

He could easily use his existin portfolio to leverage up and buy an additional $20,000 of stock and still be on a safe LVR.

Plus no one should really have any problem servicing a debt under $40,000. the repay ments would be less than $100 a week including priciple payments.

Plus the stocks would be generating dividends that would help smash out the loan. 

At the very least I would be taking on a margin loan just to clear that personal loan thats at 13%.


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## Judd (6 September 2009)

Bhenn,

First, be prepared to go broke if you do not effectively manage debt.  During last year's meltdown conservative investors in shares with LVRs in the high 70's, such as CBA and the like, and geared to 50%, which was considered safe, faced margin calls when the price of the likes of CBA tanked.

Second, if you have a personal loan, it is probably not linked to directly to share prices unlike a margin loan where the shares, and any cash in your trading account, are the security.  As a result, a margin call cannot be made if the shares go pffft.  You will simply have the high interest debt to pay off over the term of the personal loan, assuming it is a principal and interest arrangement.

Third, from my understanding, it is not the source of the borrowed funds it is the purpose of the loan which allows interest to be tax deductible.  Just remember that while you will get a tax deduction, it will only be at your marginal tax rate, eg loan $13,500 @ 13% equals $1,755 interest, marginal tax rate 30%, tax refund $526.50. So you are immediately behind $1,288.50.  Be careful if it causes you to drop into a lower tax bracket, for example, from 30% to 15% as then the tax refund will only be $263.25 and you're then $1,491.75 behind.  Crunch some numbers and hope that dividends (income and therefore taxable) and capital appreciation or realised gains (income and therefore taxable with losses only able to be offset by realised capital gains) will make up the difference.

On margin loans, if you go down that track, you may wish to get in now as the Government is introducing legislation which requires lenders, including margin loan providers, to ensure that you can service the debt if it all goes pear shaped.  It essentially means that, in the future, if you do not meet certain criteria, you could be refused a margin loan or indeed any other loan.  Nowadays, dumb Joe Public has to be protected from itself it seems.

As an aside, wonder if such a refusal will go on your credit record with Veda Advantage.  Bummer if it does.


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## rustyheela (6 September 2009)

5 - 10 year blue chip installment warrants


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## drsmith (6 September 2009)

Tysonboss1 said:


> I don't agree, His initial investment has probally grown and the initial loan should have shrank, so he should be a good position.
> 
> He could easily use his existin portfolio to leverage up and buy an additional $20,000 of stock and still be on a safe LVR.
> 
> ...



He would be struggling to use the margin loan to clear personal loan as the personal loan provides the equity for the margin loan in the first place. That though does indeed depend on the current value of his portfolio and the outstanding debt on the personal loan and that information has not been provided.


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## Tysonboss1 (6 September 2009)

drsmith said:


> He would be struggling to use the margin loan to clear personal loan as the personal loan provides the equity for the margin loan in the first place.




What I mean is Rather than continue to pay 13% via an unsecured personal loan, I would move the bulk of the loan accross to a margin loan at 7.25% interest.

If he has had this personal loan and stocks for a while he could be in a position where his shares are now worth $20,000 and the loan reduced down to $10,000. 

He could easily pull out $10K from a margin loan and clear his personal loan.

The margin loan would proove to be a much cheaper and more flexible loan anyway,


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## drsmith (6 September 2009)

Tysonboss1 said:


> The margin loan would proove to be a much cheaper and more flexible loan anyway,



Not if the margin lender charges interest on a greater minimum balance as is the case with BT Margin Lending.



> Variable interest is calculated on either the greater of the daily loan balance or $20,000 and charged to the loan account on the last business day of the month. Interest charges commence only after money is borrowed.




http://www.bt.com.au/investors/our-products/margin-lending/bt-margin-lending-online-details.asp


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## Tysonboss1 (6 September 2009)

drsmith said:


> Not if the margin lender charges interest on a greater minimum balance as is the case with BT Margin Lending.
> 
> 
> 
> http://www.bt.com.au/investors/our-products/margin-lending/bt-margin-lending-online-details.asp




Gee, Thats a pretty harsh rule, I am with commsec I don't think they have a rule like that. my margin loan is over $100k so it would bother me anyway.


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## drsmith (6 September 2009)

Tysonboss1 said:


> Gee, Thats a pretty harsh rule, I am with commsec I don't think they have a rule like that. my margin loan is over $100k so it would bother me anyway.



I had a margin loan with BT Margin Lending back in the early/mid 90's. In those days the minimum loan was $20k but I got in just before they introduced the contracts where interest was charged on a minimum balance of $20k. I think too somewhere in the mid 90's they changed the minimum loan to $50k but I'm not absolutely sure on the detail. It may have been something like min initial loan $50k, min interest on $20k.

I was thinking that today the minimum loan balance for margin lending would be $50k or more and was suprised to see that BTML was $20k when checking in relation to this discussion. I do note though that with lower loan balances they charge transaction fees. That was not the case back in the 90's.

If I was to borrow to buy shares now I would first of all use home equity.


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