Margin Loans - who do you use and why?

[ottg]

Thanks PinguPingu!

 

[Wysiwyg]

I would so go with Bell Direct if their cash account was actually a bank account.

Is that because it doesn't have the Government Guarantee?

 

[PinguPingu]

Is that because it doesn't have the Government Guarantee?

Its literally not even a bank account. It's basically a trust account that when you deposit 'cash', it issues you with Bell debentures/secured notes.

 

[ottg]

Found this recent margin loans comparison report from Canstar - tables on last page
http://cdn.canstar.com.au/wp-content/uploads/2015/05/Margin-Lending_StarRatings_Jan_2015.pdf

 

[jank]

A question on Margin Loans. What happens to the div and franking credits for shares you 'own' under the margin load. Do you collect them as well. Also, can you buy international shares or are you restricted to Australian shares.

 

[VSntchr]

A question on Margin Loans. What happens to the div and franking credits for shares you 'own' under the margin load. Do you collect them as well. Also, can you buy international shares or are you restricted to Australian shares.

With regard to your question on dividends and franking; think of a margin loan the same way you would think of a line of credit. I.e. the shares are held entirely in your name and the dividends and franking are entirely yours. As for international shares, this would depend on the margin provider that you choose.

 

[jank]

Thanks for the info.

Some back of the napkin calucations to flesh this out a little.


$20,000 in personal Stock
$30,000 in own Cash
$50,000 Margin Loan.

So can invest up to $100k

7% interest rate on 50,000 = $3,500
3% average dividend = $3,000
Gross Loss = $500
Tax deduction .37 x $500 = $185
Net Loss = $315

So it would cost me $315 per year to hold an extra $50,000 on equity on my books?
Am I missing anything here?

Assume of course that the underlying equity stays static for now.
Also, how does franking credits play into this, this would mean my Net Loss would be smaller?

 

[tech/a]

Most use Margin in correctly.

Well I think they do.

Margin should be used in circumstances where your purchase requires more Money that you have available equity.
This should be done without increasing Risk.

Lets take a trade in a stock worth $25
You have an allocation of $10K max to this trade.
You have 2 stops one relaxed and one aggressive.

Relaxed is $1c so you have decided that you'll risk 3%
So $300/$1 = $7500 so no problems.

Aggressive trade your stop is 50c below your buy price and you still want to risk $300
So $300/.50 = $600@$25 = $15000.
You take the extra $5000 on margin

Risk is still the same.

 

[VSntchr]

Most use Margin in correctly.

Well I think they do.

Margin should be used in circumstances where your purchase requires more Money that you have available equity.
This should be done without increasing Risk.

Lets take a trade in a stock worth $25
You have an allocation of $10K max to this trade.
You have 2 stops one relaxed and one aggressive.

Relaxed is $1c so you have decided that you'll risk 3%
So $300/$1 = $7500 so no problems.

Aggressive trade your stop is 50c below your buy price and you still want to risk $300
So $300/.50 = $600@$25 = $15000.
You take the extra $5000 on margin

Risk is still the same.

Agree when your talking about trading tech, but for the purposes of levering up a long term portfolio I think the application is different.
Sir O had a few good posts on his use of margin for a longer term 'through the cycle' portfolio approach. Perhaps the OP should have a read of this also. I think it is in Sir O's beginner thread.

 

[jank]

I do not want to trade short term, what I want is to increase the amount of money that I can put to work, while making it tax efficient in the long run.

 

[tech/a]

I do not want to trade short term, what I want is to increase the amount of money that I can put to work, while making it tax efficient in the long run.

Just take out a loan---or CFD's
While its nice to think only of the upside
You also have a potential down side

I still cant understand long term holders who don't think there is any risk they need to mitigate.

The feeling seems to be any fall in price and she'll be right!
At least margin calls keep you honest---and aware.

 

[craft]

Thanks for the info.

Some back of the napkin calucations to flesh this out a little.


$20,000 in personal Stock
$30,000 in own Cash
$50,000 Margin Loan.

So can invest up to $100k

7% interest rate on 50,000 = $3,500
3% average dividend = $3,000
Gross Loss = $500
Tax deduction .37 x $500 = $185
Net Loss = $315

So it would cost me $315 per year to hold an extra $50,000 on equity on my books?
Am I missing anything here?

Assume of course that the underlying equity stays static for now.
Also, how does franking credits play into this, this would mean my Net Loss would be smaller?

Depends on your marginal tax rate: for the top rate numbers are as follows.

A fully franked 3% return on your personal $50K contribution would give you an after tax return of $1135

Adding a 50K margin loan at 7% would reduce your after tax return to $416. You are still positively geared; the cost is a reduction of after tax income of $719 – that requires around a 1.5% after tax capital gain on the 50K borrowed to break even. Hold the asset for more than 12 months and you get the 50% CGT deduction to help achieve the after tax result.

Bear in mind if interest rates go up your cost to hold the extra 50K exposure increases and the higher interest rate will also likely have a negative impact on the price of your holdings. The cheapness of the exposure is quite attractive at the moment but never forget leverage is a double edged sword.

 

[jank]

Just take out a loan---or CFD's
While its nice to think only of the upside
You also have a potential down side

I still cant understand long term holders who don't think there is any risk they need to mitigate.

The feeling seems to be any fall in price and she'll be right!
At least margin calls keep you honest---and aware.

In fairness you are contradicting yourself here, saying that long term holders don't think of any risk yet then accept the fact that a margin call makes one honest...yet then recommend a CFD, which to me has more risk.

Of course I am aware of the downside risk, everything has risk, from leaving cash on deposit to taking out options on a speculative miner.

 

[tech/a]

In fairness you are contradicting yourself here, saying that long term holders don't think of any risk yet then accept the fact that a margin call makes one honest...yet then recommend a CFD, which to me has more risk.

Of course I am aware of the downside risk, everything has risk, from leaving cash on deposit to taking out options on a speculative miner.

Happy to help.

 

[jank]

Depends on your marginal tax rate: for the top rate numbers are as follows.

A fully franked 3% return on your personal $50K contribution would give you an after tax return of $1135

Adding a 50K margin loan at 7% would reduce your after tax return to $416. You are still positively geared; the cost is a reduction of after tax income of $719 – that requires around a 1.5% after tax capital gain on the 50K borrowed to break even. Hold the asset for more than 12 months and you get the 50% CGT deduction to help achieve the after tax result.

Bear in mind if interest rates go up your cost to hold the extra 50K exposure increases and the higher interest rate will also likely have a negative impact on the price of your holdings. The cheapness of the exposure is quite attractive at the moment but never forget leverage is a double edged sword.

Thanks for the info. Makes it more clear now.

 

[Bintang]

Found this recent margin loans comparison report from Canstar - tables on last page
http://cdn.canstar.com.au/wp-content/uploads/2015/05/Margin-Lending_StarRatings_Jan_2015.pdf

That Canstar report is very interesting. The average variable interest rate of the 8 listed lenders is 7.76% but since the report date is Jan-15 I presume these rates will have come down to around 7.25% by now.
However, I am wondering why Westpac has a much lower rate of 5.45% (with effect from 1 Jun 15) https://onlineinvesting.westpac.com.au/Public/MarginLoans/MarginLoans.aspx

I use an ANZ margin loan, for which the current variable interest rate is 7.59%.
Does anyone here use Westpac?
I’m wondering if I should be changing lenders. A 2% interest rate differential is a bit hard to ignore.