Margin loan for emergencies -- a noob question

[elpechos]

Hello; I've been investing for a few years but I've never explored margin loans.

I'm wondering if it's possible/sensible to use a margin loan facility just for emergencies?
eg say I need dental or surgery work done that exceeds my emergency funds and rather than sell my shares
could I borrow against them?

I understand how the loan to value ratio works etc and the required security; but what I'm not sure on is

a.) Can drawdown on a margin loan for non investment purposes? eg dental work
b.) Can I have a margin facility available but unused so I don't pay any interest until I draw down?

I notice on the suncorp margin loan site it says on the faq you can pay off the full balance and leave the facility open until you need it...but on the other hand it says you have to have a minimum of 20,000 borrowed. Do they mean you always have to be paying interest on 20,000 or they'll get sad or that you have to have security for a minimum of 20,000?

Is there a better way to access capital in my portfolio for emergencies? Or should I just sell to raise capital (Thus risking market timing issues/unbalancing my portfolio, etc)

Here's my current portfolio if it helps answer questions

http://eyeglobes.info/shares/shares.aspx

Cheers,
Matthew.

 

[tech/a]

You want a line of credit.

If you need to cover "emergencies" then you
shouldnt be trading--particularly on Margin.

 

[elpechos]

You want a line of credit.

If you need to cover "emergencies" then you
shouldnt be trading--particularly on Margin.

I'm not trading on margin nor was planning on doing so.

I was looking for the best option to turn shares into money if there is an emergency that requires more liquidity than I have at the time.

Say an emergency dental or surgery might cost 20 or 40,000 It seems silly to have this much lieing around in a bank account just for the remote chance I might need it. Or to sell 20,000 of my portfolio

To be more specific. What I'm wondering is. If I need to raise cash for an emergency, is selling shares the best way of doing it? I see a lot of problems in that -- unbalance my portfolio, attract high brokerage, etc, etc. Seems like a loan secured against my shares would be more sensible, but was after advice if this is the case or not.

 

[tech/a]

I'm wondering if it's possible/sensible to use a margin loan facility just for emergencies?

I'm not trading on margin nor was planning on doing so.

???
I had a wife like that once.

For 20-40k dental work I'd be in asia.
I personally keep spare funds.
Only < 5% of nett wealth in stock.(Currently )
45% in 2007.

Id simply sell some.

 

[skc]

Say an emergency dental or surgery might cost 20 or 40,000 It seems silly to have this much lieing around in a bank account just for the remote chance I might need it. Or to sell 20,000 of my portfolio

To be more specific. What I'm wondering is. If I need to raise cash for an emergency, is selling shares the best way of doing it? I see a lot of problems in that -- unbalance my portfolio, attract high brokerage, etc, etc. Seems like a loan secured against my shares would be more sensible, but was after advice if this is the case or not.

It it's that remote a chance then I'd just sell my shares...

You can always buy them back with a margin loan when the time is right.

Otherwise, consider dental insurance ...

 

[Julia]

Maybe consider private health insurance.

 

[prawn_86]

20 - 40k for non elective surgery here in Aus? What sort of procedures cost that? Even for dental i can't imagine spending 20k in an emergency. I had several teeth snapped in half a few years back and for work to get it back to normal it was about 4k, so you need to lose virtually all your teeth for it to cost 20k...

If it is an emergency medicare covers it (my wife had 20k worth of non dental treatment once), otherwise as others have said, perhaps consider insurance.

 

[elpechos]

20 - 40k for non elective surgery here in Aus? What sort of procedures cost that? Even for dental i can't imagine spending 20k in an emergency. I had several teeth snapped in half a few years back and for work to get it back to normal it was about 4k, so you need to lose virtually all your teeth for it to cost 20k...

If it is an emergency medicare covers it (my wife had 20k worth of non dental treatment once), otherwise as others have said, perhaps consider insurance.

I've got insurance but have noted it frequently covers sweet **** all, especially if it comes to dental.
medicare blue ribbon extras only covers 2k of major dental for example.
From what I've seen most extras don't cover much more.
Looking at the fees schedule, looks like a couple root canals plus crowns and follow up could run 10k fairly easy

a hip replacement etc could run 40, 45k

This was more hypothetical than anything; was just wondering if I should set up some kind of credit facility /before/ an emergency happens or if simply selling to raise capital was the best option if it was necessary to do
so. Selling may be expensive if my portfolio is heavily diversified as I'd attract brokerage numerous times for selling a range of securities to raise such a large amount.

 

[elpechos]

www.smilessentials.com.au/typical_fees.php
Example of how nasty the fees are these days; given extras only covers $2000 health insurance seems completely pointless.

 

[McLovin]

www.smilessentials.com.au/typical_fees.php
Example of how nasty the fees are these days; given extras only covers $2000 health insurance seems completely pointless.

Except that's cosmetic dentistry.

Here's a regular dentist...

http://www.smile.com.au/dental-dentist-fees-prices-costs

Depending on how old you are, do you need to worry about a hip-replacement?

 

[elpechos]

Thought also occurs that selling to pay for a emergency would cause a capital gains event whilst borrowing would not.

 

[tech/a]

Thought also occurs that selling to pay for a emergency would cause a capital gains event whilst borrowing would not.

Sell your losing stock.

 

[elpechos]

Except that's cosmetic dentistry.

Here's a regular dentist...

http://www.smile.com.au/dental-dentist-fees-prices-costs

Depending on how old you are, do you need to worry about a hip-replacement?

I presently do not, no. I was just wondering how one would best manage such an event, selling capital or borrowing. And if the answer is borrow, how would one best borrow against shares as security for personal reasons.

 

[McLovin]

I presently do not, no. I was just wondering how one would best manage such an event, selling capital or borrowing. And if the answer is borrow, how would one best borrow against shares as security for personal reasons.

My own opinion to the question would be to have adequate insurance, or be prepared to wait on the public system. I don't mean to sound rude, but it seems a fairly obvious answer, no different to saying if your house burnt down should you sell your shares or borrow to rebuild it, when the answer would be to have insurance in the first instance.

Otherwise, I'd start selling shares. If I'm ill the last thing I want to be worrying about is whether I'm going to receive a margin call in my sick bed.

 

[elpechos]

My own opinion to the question would be to have adequate insurance, or be prepared to wait on the public system. I don't mean to sound rude, but it seems a fairly obvious answer, no different to saying if your house burnt down should you sell your shares or borrow to rebuild it, when the answer would be to have insurance in the first instance.

Most (all?) medical insurance I can find have limits far beneath what the surgeries realistically cost these days

medibank extras for example only runs $2,000 of major dental a year, not enough for even 1 tooth and crown

Medium levels of cover don't even cover replacements like Hip & knee joint replacement surgery /at all/ until you get to the ultra level of covers which runs ~$5,000 a year. At this rate with interest I could afford to completely replace everything in a very good hospital without risking my life on the whims of some insurance company anyhow in under ten years.
Rather than get second rate service from private health insurance and only get 60 to 70% of the total cost back for 'some' problems. Wouldn't it be better to have 100k of capital after 10 years I can resolve /any/ ermergency with, rather than just some?

So the question is more like "Would you get insurance that would only cover 70% of your house burning down 'if your lucky and we can change the terms any time' doesn't cover any of the contents or loss of income etc etc

Which I could easily do if I just saved the cost of 'ultra cover' in an indexed fund and borrowed against it

So I'd put to you that it'd be silly to just relay on private health anyhow. The coverage is crap, the payback is crap, and they make their terms ****tier every year. It also seems of dubious worth unless I intend to require a hip replacement in the next 5 years.

 

[McLovin]

I have top cover with NIB, it costs me ~$168/month. It will cost me more going forward with the partial loss of the rebate, depending on how much I draw from my company as a dividend each year, but it won't be costing $5,000.

How many crowns/root canals etc are you planning to have done each year?

Touchwood, I've only been to hospital once for elective surgery. The public waiting list was 9 months for what I had done and I was being operated on 7 days after I had my first meeting with the surgeon (and that was because I had needed to postpone it). Well worth IMO.

I certainly wouldn't be putting away such a large amount of capital on the off-chance I need a hip or knee replacement. My .

 

[bellenuit]

Yes, you can have a margin loan open and only draw against it when you need it. I can't specifically deal with Suncorp's product, but in general you only pay interest on the money borrowed. Some lenders may insist on a minimum drawdown (I think CommSec are $500).

Most lenders also allow you to withdraw cash on your margin loan, which you could then use for the medical treatment you mentioned, but remember you cannot claim the interest paid against this portion of your loan as an income tax deduction. Unless the lender provides such a facility, you will have to manually apportion the interest paid into tax deductible and non-tax deductible amounts.

One way around this, but which may have unintended negative consequences, is to sell an amount of shares equal to the amount you want for medical purposes. Withdraw the proceeds of this sale as cash. Then buy back the same amount in shares, using the margin loan. The interest on that drawdown would be fully tax deductible and you effectively have done what you wanted in a more effective tax way.

The downsides I alluded to include tax implications (eg. Capital Gains) on the share sale, market movements in the period between selling and buying, transaction costs and possible some other issues.

 

[elpechos]

Yes, you can have a margin loan open and only draw against it when you need it. I can't specifically deal with Suncorp's product, but in general you only pay interest on the money borrowed. Some lenders may insist on a minimum drawdown (I think CommSec are $500).

Most lenders also allow you to withdraw cash on your margin loan, which you could then use for the medical treatment you mentioned, but remember you cannot claim the interest paid against this portion of your loan as an income tax deduction. Unless the lender provides such a facility, you will have to manually apportion the interest paid into tax deductible and non-tax deductible amounts.

One way around this, but which may have unintended negative consequences, is to sell an amount of shares equal to the amount you want for medical purposes. Withdraw the proceeds of this sale as cash. Then buy back the same amount in shares, using the margin loan. The interest on that drawdown would be fully tax deductible and you effectively have done what you wanted in a more effective tax way.

The downsides I alluded to include tax implications (eg. Capital Gains) on the share sale, market movements in the period between selling and buying, transaction costs and possible some other issues.

Cheers, this is the answer I was looking for.

 

[elpechos]

I have top cover with NIB, it costs me ~$168/month. It will cost me more going forward with the partial loss of the rebate, depending on how much I draw from my company as a dividend each year, but it won't be costing $5,000.

How many crowns/root canals etc are you planning to have done each year?

Touchwood, I've only been to hospital once for elective surgery. The public waiting list was 9 months for what I had done and I was being operated on 7 days after I had my first meeting with the surgeon (and that was because I had needed to postpone it). Well worth IMO.

I certainly wouldn't be putting away such a large amount of capital on the off-chance I need a hip or knee replacement. My .

And this is why I was interested in margin loans. Because I had a look at hospital covers and the downsides seemed to be

A.) What they cover seems to change often
C.) Money invested into private health can't be used for other emergencies, and only for a handful of treatments.
D.) For single people such as myself, the value of private health funds seems much lower than for families or couples
E.) It seems like the private health funds only cover the /cheap/ operations, ones I could easily pay for myself by selling shares anyhow.

This lead me to ponder if I should just invest more aggressively and have a facility that would allow me to borrow in the event of an emergency. You see.
The advantages of investing what I would have spent on private health are
F.) Gives me a material advantage now in the form of increased income
G.) The capital can be used for any emergency, job, medical, etc, etc
H.) If I can borrow against my shares, I can get the required capital for the procedure rapidly and without incurring brokerage of selling lots of individual assets or possibly CGT

It appeared to me that the advantages of F,G and H outweighed the advantages of private health and in only a short period, 5 to 10 years, mainly because private health covers mainly the cheaper operations and even then only covers 70% This seems a much worse deal than say house insurance
Cheers,
Matt.

 

[drsmith]

A margin loan should never be considered as a source of emergency finance.

It's not garanteed that funds will be avaliable at the time of an emergency and the loan itself has the potential to create a financial emergency of its own.