Net cost of borrowing

[RamonR]

I have been trying to work out the net costs of borrowing to invest in income producing shares.

For the purpose of this discussion assume $100,000 borrowed at 10.5 %
placed in shares returning 5% fully franked dividends.


assuming 30% Tax rate

Borrowing cost 10500 Tax Return 3150 Real Cost 7350
Return 5000 Out of Pocket 2350

Assuming 40% Tax rate
Borrowing cost 10500 Tax Return 4200 Real Cost 6300
Return 4500 Out of Pocket 1800

Are these figures correct. It seems almost too good to be true. In effect it only cost me around 2% of borrowed funds to control and benefit from capital gains on up to $100,000 dollars woth of shares

 

[jet328]

Are these figures correct. It seems almost too good to be true. In effect it only cost me around 2% of borrowed funds to control and benefit from capital gains on up to $100,000 dollars woth of shares

That's the Australian tax system for you, rewarded for borrowing & punished for saving

Figures look pretty good to me, although if you're on the 40% rate will have to pay a bit more tax on the dividends as fully franked shares have tax paid at the company rate of 30%

When the market is going in your direction leverage works great. But the reverse also applies. Just be careful not to over extend yourself & you've had some experience investing without leverage first

 

[RamonR]

Thanks for the reply jet328.

I allowed for having to pay 10% tax on dividends at the 40% tax rate to make up the difference between tax that has been paid and what is owing.


I plan on being cautious with my borrowing at this stage.
Instead of borrowing to the hilt, I will use it to buy larger market parcels then I could unless I saved for many months.
Then I will pay of as fast as possible building up portfolio borrowing capacity until I know much more and the also the market starts to pick up.

 

[Hyperion]

Assuming 40% Tax rate
Borrowing cost 10500 Tax Return 4200 Real Cost 6300
Return 4500 Out of Pocket 1800

I think you made a small mistake. The return is $4,285 (not $4,500)