# Using property equity to invest in shares



## daniellee (5 March 2010)

Hi,

Newbie question. Did a search but could not find an answer.

Is it possible to approach the bank to use the property equity to invest / trade in the stock market? I was told the bank will lend but only if this is done through a financial planner / managed fund.

How does one get around this? Use a Line of Credit / Equity loan?

Regards

Daniel Lee


----------



## RamonR (5 March 2010)

Yep use a line of credit or asset line.
Make sure you only use it for tax deductible purposes to make putting in tax returns easier.

Thats how I got started.
After a while I started to see opportunities to trade, so I used the shares I bought on the line of credit as collateral for margin loans.


----------



## Tysonboss1 (5 March 2010)

daniellee said:


> Hi,
> 
> Newbie question. Did a search but could not find an answer.
> 
> ...




You can just apply for an investment loan or a line of credit. As long as you can service the loan they should lend up to 80% of the value of your property.


----------



## Bushman (5 March 2010)

Watch those margin loans. Can get ugly re the family home.


----------



## Krusty the Klown (5 March 2010)

Hi Dan

Banks don't require you to see a financial adviser if you borrow money for shares against your home.

They don't care what you do with the cash as long as you keep up your repayments.

As suggested earlier, try and set up a separate loan from your current debt to keep the ATO happy.


----------



## matty77 (5 March 2010)

someone was telling me about this product:

https://www.colonialgearedinvestments.com.au/gearing_information/calia_plus.asp

now I in no way endorse it or say if its good or bad, but have a look at it, maybe its suitable for your needs.


----------



## ROE (5 March 2010)

if you starting out start the hell away from margin loan, this can get ugly quick...using equity is the safest options, you never face margin call
and you sell and buy when you want as long as you keep the repayment up
banks dont care...plus much cheaper interest too..

say you own 50K on a property worth $350K, you want to take out 100K for shares

what you need to do is go to your banks and say you want to draw down some of the equity in your home and create a seperate account for tax purposes.

once all the paper work approved, they give you the cheque, you deposit into your shares account and start keeping the paper on interest payment on your new seperate account and your shares account.


----------



## Soft Dough (5 March 2010)

ROE said:


> if you starting out start the hell away from margin loan, this can get ugly quick...using equity is the safest options, you never face margin call
> and you sell and buy when you want as long as you keep the repayment up
> banks dont care...plus much cheaper interest too..
> 
> ...




Whatever you do, make sure that the amount you "borrow" from your house is fully tax deductible ( never done it like the above example, but it looks like the $100k would not be tax deductible ). Make sure you make a 30 minute appointment with your accountant to clarify your setup, the $50-100 invested here is usually worth many thousands in the long term. ( for example you may be better off with a margin loan at 8% than drawing down off your house at 7% ) 

NEVER trust a bank teller / banker with taxation advice, they are usually incompetent fools, not worth wasting your breath on.

So in all check with your accountant first so that you get maximum tax advantage.


----------



## ROE (6 March 2010)

Soft Dough said:


> Whatever you do, make sure that the amount you "borrow" from your house is fully tax deductible ( never done it like the above example, but it looks like the $100k would not be tax deductible ). Make sure you make a 30 minute appointment with your accountant to clarify your setup, the $50-100 invested here is usually worth many thousands in the long term. ( for example you may be better off with a margin loan at 8% than drawing down off your house at 7% )
> 
> NEVER trust a bank teller / banker with taxation advice, they are usually incompetent fools, not worth wasting your breath on.
> 
> So in all check with your accountant first so that you get maximum tax advantage.




It's fully tax deductible on the interest you paid as long as the 100K is in a separate account and got nothing to do with your home loan.

You repay on 2 accounts....the banks draw 2 repayment each fortnight or monthly or how ever u set it up.

This is no different from you going to the bank borrow 100K to invest and use your home as collateral 

but check with your accountant to be sure..


----------



## cutz (6 March 2010)

Krusty the Klown said:


> They don't care what you do with the cash as long as you keep up your repayments.




Not necessarily,

If you set up a LOC, interest can continue capitalizing as long as you don't exceed your credit limit.

Obviously it's not a tactic for beginners, the threat of a black swan is always imminent.


----------



## gooner (6 March 2010)

cutz said:


> Not necessarily,
> 
> If you set up a LOC, interest can continue capitalizing as long as you don't exceed your credit limit.
> 
> Obviously it's not a tactic for beginners, the threat of a black swan is always imminent.




Too true Cutz

If the crap hits the fan, you could find yourself with no shares, but a bigger debt to pay off on the house or in worse case, you could lose the house (Storm financial clients as an example). Not pleasant.  Think about how much the extra money from the strategy (if successful) would change your lifestyle, compared to how much a big loss would change your lifestyle.  I always use this maxim in my investing. Which means no debt, diversified blue chips in my SMSF and a little bit more risk in the equities I hold outside the SMSF.


----------



## Krusty the Klown (6 March 2010)

cutz said:


> Not necessarily,
> 
> If you set up a LOC, interest can continue capitalizing as long as you don't exceed your credit limit.
> 
> Obviously it's not a tactic for beginners, the threat of a black swan is always imminent.




You can do this, the CALIA loan product mentioned earlier allows this. 

The CALIA loan has a margin loan built in to the facility and is only available through financial advisers.

The bulk of the Storm clients who lost their dough used this product.


----------



## cutz (6 March 2010)

Hi Krusty,

In my previous post I was referring to a stock standard line of credit provided by the major banks under several trade names.

No financial adviser intervention is required, the bank doesn't specify how you must use the money. Whether you invest in a Toorak Tractor or BHP, the bank doesn't need to concern itself with these fine details.


----------



## Krusty the Klown (6 March 2010)

No worries cutz

As far as I am aware, the CALIA product is the only loan facility that is restricted to financial advisers, I think because the margin loan is built in.

I know NAB, St George and Wide Bay Building Society allow capitalising investment LOC's.

Probably a few non-conventional lenders would do so too.

Anybody know of any others?

P.S. Just curious, what is a Toorak Tractor???? I'm not a Melbournian.


----------



## daniellee (7 March 2010)

ROE said:


> It's fully tax deductible on the interest you paid as long as the 100K is in a separate account and got nothing to do with your home loan.
> 
> You repay on 2 accounts....the banks draw 2 repayment each fortnight or monthly or how ever u set it up.
> 
> ...




Hi

Sounds rather straight forward. Get a separate loan from my property equity. Just like property investing. Clearly, I am not going to take out a separate loan just yet, as I am still learning about share trading and am not going to take that kind of risk. So far, I am leaning towards technical analysis; Read Alan Hull's books and his technique seems to fit my personality and objectives.

Alright. Another question I have is what is a good starting amount to invest in shares? I just signed onto the ASX newsletter and saw that they have a trading game where participants start with $50K. Is that a good amount to start with, consider diversification across several sectors as a risk management approach. Personally, I have $15K at the moment.

With such a small amount, I will be looking at paper trading for a few months first to iron out my trading strategy.

Thanks.

Daniel


----------



## Krusty the Klown (7 March 2010)

daniellee said:


> Hi
> 
> Clearly, I am not going to take out a separate loan just yet, as I am still learning about share trading and am not going to take that kind of risk.
> 
> ...




Hey Daniel

It's good that you are waiting to test the water before you borrow to invest.

Be careful if you want to redraw funds from your existing home loan to invest, as taxpayers make it difficult for themselves when they do this.

If you do this, every time you make a repayment, the ATO deems that a portion of this repayment goes to pay off some of the investment component of the loan in equal proportion.

It makes it very difficult to calculate how much interest is actually deductible. That's why people like the separate loan for ease.

Good luck!!!!

Krusty


----------



## Sir Osisofliver (8 March 2010)

No one has yet mentioned a reserve.

Say you owe 50K on a house worth 350 k.  The bank will alow you to borrow up to 80% so you can borrow a max 280k minus your existing 50k for a maximum borrowing of 230k.

So how much of that available 230k should you borrow?

Your reserve should be your safety net against unexpected circumstances. I generally use a minimum 20% of available funds (46k in this case) with other reserves on top for specific expenses that can be planned out.

Simple rule of investing is to protect the integrity of the assets you already own.  You don't want to risk the family home, so if you are using equity within this asset, make sure you have enough reserves in place, so that if you lose your job or end up in traction for siz months you don't lose your house.

Cheers

Sir O


----------



## luap77 (8 March 2010)

Regarding the tax deductible nature of the interest on funds taken from a line of credit/equity loan and applied to shares, is this absolutely limited to shares that produce income (dividends) or can a tax deduction be claimed on the interest if the funds were used for purchasing speculative stocks which were then sold some time later for a capital gain (as opposed to traded in the short term? Otherwise, would the tax deduction only apply if one obtained classification as a trader so that any share-related gains are classified as income? Only reason I ask is that somebody one told me that if you claim an interest deduction for line of credit/equity monies that are applied to non-dividend yielding shares (e.g. typically spec stocks) that the ATO will send a sheet asking you to show how those shares were income producing.

Would greatly appreciate it if somebody could shed some light on this.


----------



## jet328 (8 March 2010)

-read the Storm thread first



RamonR said:


> After a while I started to see opportunities to trade, so I used the shares I bought on the line of credit as collateral for margin loans.




-Don't even consider the above, double gearing. You're a genius while it works until the unexpected happens and then, wipe out(and the unexpected will happen).


----------



## luap77 (8 March 2010)

I'm not suggesting that anybody consider my question from 2 posts ago, but I would appreciate an answer to it! Thanks.


----------



## cutz (8 March 2010)

luap77 said:


> I'm not suggesting that anybody consider my question from 2 posts ago, but I would appreciate an answer to it! Thanks.




I would apply the same logic if buying a block of land using a LOC, can you claim the interest ? >>No, the block of land isn't producing an income.

Is the specy paying a dividend ? If the answer is no I can't see how you are entitled to claim the borrowing costs.

Note, this is my interpretation only. My advice would be to consult a tax professional.


----------



## Krusty the Klown (8 March 2010)

The tax law says that the interest is deductible when the geared asset produces assessable income or has a _*reasonable*_ chance of producing assessable income.

So deductibility would differ for each situation.

If the asset has a history of paying dividends but it is not at the moment, then it reasonable to assume it will in the future and would be deductible in the current tax year.

If you take it a step further, a company or business' sole reason for existence is to produce profit for its owners. Therefore dividends can be declared at any time even if earnings are retained regularly. To me if this asset is geared then I interpret this interest to be deductible and is the advice I give to my clients. However, this is only for deductions in the current tax year.

You can also claim the interest deduction using the CGT provisions, simply including the interest expense in the cost base when calculating the capital gain or loss. If you bought an asset with the idea of profiting from capital gain - then that is assessable income and interest is deductible.

Either way the interest is deductible, its just how you claim it that is the issue. 

A vacant block of land is not a different story. If you are paid agistment fees or timber rental income, then this geared asset interest would be deductible in each tax year.

But a vacant block of land with no commercial activity taking place would not be deductible each tax year but is still deductible. If you bought the land with the idea of profiting from capital gain then the interest is still deductible but can only be claimed by adding the total interest cost to the capital cost base as above.

Hope that helps


----------



## Ozymandias (8 March 2010)

All this has been discussed before, check out this excellent thread;

https://www.aussiestockforums.com/forums/showthread.php?t=18340

Also check out tax ruling TR200/2. If you have redraw on your current home loan, you may not need to setup a separate account / loan, or ask the bank for extra money, if you're ahead on your payments.


----------



## luap77 (9 March 2010)

Thanks for the replies. 

Ozymandias; I was part of that thread (thanks for pointing the thread out)...just had a few things greyed by contradictory responses from the ATO when I put such questions to them (didn't know which way was up by the end of it!), hence came back to ASF for further clarification.

Krusty; found yours especially helpful  Gives me a great starting point for seeking my own financial advice should I wish to make my own decisions along such lines. Much appreciated.


----------



## Krusty the Klown (9 March 2010)

No problem luap.

The key to understanding tax is that it is governed by laws. Laws are interpreted differently - by lawyers, judges, courts, the ATO, and taxpayers. You have to look and see how the law applies to you - not anybody else. 

Just because someone else tried something and it did not work, it does not mean you can't apply it. 

The problem is tax law is very complex and not an exact science. Hence the common misunderstanding about the deductible interest on a vacant block of land. Easy mistake to make when you look at the ATO website.

Keep in mind ATO employees are not qualified to give tax advice just because they work there. All they can do is read to you the same stuff you see on the ATO website. How you interpret that is up to you. 

By all means approach the ATO for facts but not opinions. But that's just my opinion.....


----------



## luap77 (29 March 2010)

Found some confirmation of what Krusty mentioned in his post of 8th March.

http://www.thebull.com.au/articles_detail.php?id=3395

Thanks again Krusty.


----------



## RamonR (30 March 2010)

jet328 said:


> -read the Storm thread first
> 
> 
> 
> -Don't even consider the above, double gearing. You're a genius while it works until the unexpected happens and then, wipe out(and the unexpected will happen).




I absolutely disagree.
Using this strategy during the lowest point and still here and happy.

Agree that you should know what you are doing and should avoid being excessively geared.
I use my asset line for long term holds and margin loans for trading purposes.


----------



## Cobweb (5 April 2010)

Just read this thread, sorry for my ignorance but what is a Black Swan and what does LOC stand for?


----------



## So_Cynical (5 April 2010)

Cobweb said:


> Just read this thread, sorry for my ignorance but what is a Black Swan and what does LOC stand for?




Black swans explained http://en.wikipedia.org/wiki/Black_swan_theory

LOC = Line Of Credit http://en.wikipedia.org/wiki/Line_of_credit


----------



## Cobweb (5 April 2010)

thanks So Cynical


----------



## tech/a (5 April 2010)

If you have increased equity from your home why would you not duplicate it with another IP (Investment Property).
You can have someone pay the interest you can claim most things and enjoy 2 increasing assets.
Then Do it again.
Then Do it again.


----------



## drsmith (5 April 2010)

ROE said:


> if you starting out start the hell away from margin loan, this can get ugly quick...using equity is the safest options, you never face margin call
> and you sell and buy when you want as long as you keep the repayment up
> banks dont care...plus much cheaper interest too..
> 
> ...



When first investing in shares I started with a margin loan but that was because I did not own a home at the time. I had a secure job and cheap rent and was conservative with the level of gearing on the margin loan.

After I purchased a home I used the equity in that ahead of the margin loan for the reasons quoted above. The home is long since paid off but I retain some access to home equity credit as the balance of the loan is held in an offset account.

One though should never gear to the max with home equity and then a margin loan on the top of that. That's a recipe for disaster.

Come to think of it a margin loan on it's own geared anywhere near the max is a recipe for disaster as many margin lender investors from 2008 would confess.


----------



## drsmith (5 April 2010)

tech/a said:


> If you have increased equity from your home why would you not duplicate it with another IP (Investment Property).
> You can have someone pay the interest you can claim most things and enjoy 2 increasing assets.
> Then Do it again.
> Then Do it again.



Just remember towards the end though to leave a little profit for someone else.


----------

