Question on margin lending

[RichKid]

We made it bullmarket,

It would be a boring world if we all agreed with each other.

Cheers

Hi Rozella,
An informed and robust debate is always welcome. Your observation reminds me of a favourite quote: If everyone is thinking the same thing then someone isn’t thinking.
-General George Paton

Here's an article on margin lending.

Lend your portfolio a hand

http://www.smh.com.au/news/money/le...1148956396766.html?page=fullpage#contentSwap2

Related coverage
* Margin lending comparison: http://www.smh.com.au/media/2006/05/31/1148956396520.html


Michelle Innis
SMH May 31, 2006

Pre-pay the interest bill on your margin loans before June 30 but shop around first.

End-of-year tax time is no longer the busiest time of the year for margin lenders. Australians in fact have $21 billion in outstanding margin loans and the average loan size is close to $140,000, according to Reserve Bank of Australia (RBA) data.

"In the past, getting a margin loan might have been something investors did so the could pre-pay their interest and claim it against their tax," says Commonwealth Securities' general manager of geared investments, Phyllis Sequeira.

"But we have had growth of 35 per cent already this year. We haven't yet got into tax-time." (Tax-time is loosely defined as the few weeks before the start of the new financial year on July 1.)

ANZ's head of margin lending and E*Trade, John Daley, says only about one-third of ANZ margin loan clients opt for a fixed rate loan.

Only those with a fixed interest rate can pre-pay their interest bill and then claim that interest against their tax in the next financial year, or from July 1.

"What you've got to look at is the overall investment environment and whether you're going to get good returns," Daly says. "It's not about pre-paying your tax. It's about increasing your wealth in a tax-efficient way."

Daly says growth has been good through the year, not just in the rundown to July 1.

St George head of distribution Craig Mowll concurs. "It's about growing your investment portfolio. Our average loan size is $175,000 and our investors' portfolios tend to be diversified."

One major reason for continuous strong growth in margin lending is the boom in share prices. Australians who have charged into the sharemarket have had returns of 20 per cent-plus because demand for resources has fuelled an incredible boom.

Last week the market fell, with the S&P ASX 200 benchmark index dropping from a high of 5364.5 on May 11 to 5014 on May 23. BHP Billiton, which peaked at $32 a share, fell to $27.45 before starting to climb again on May 24.

A CommSec economist, Craig James, says the market was "priced for perfection" before the correction. "The fundamentals are the same and we still expect the ASX 200 to rise about 12 per cent over the year," he says. "But we needed that correction."

Loan sizes have grown, as have the number of loans. And because the market has been buoyant, margin calls have dropped. Margins calls happen at a rate of one for every 2000 customers, according to RBA data for December 2005. This compares with five calls for every 1000 customers in March 2003.

A margin call occurs when the value of the shares held falls below an agreed value. If that happens, the investor must top up the loan, either with cash, to restore the loan-to-value ratio (LVR), or by selling shares. In a falling market, shares may be sold at a loss.

Otto Rieth, the head of van Eyk's direct shares team, says: "Normally, you might have returns in the 8 to 10 per cent range each year. Returns in excess of 20 per cent are exceptional. And that's the result of several factors, including demand from China for resources."

He says miners have been reluctant capital investors, which means supply is restricted, and long-term interest rates, for example the yield on a 10-year bond, have been very low for a long time.

"That's an incentive for people to take on more debt but it also leads to mispricing of risk," Rieth says.
He warns that if many investors have borrowed to buy shares, it won't take much for "things to go pear-shaped".
"There is currently a complacency in the market," he says. "Our market can't keep going up. But over the medium term, the outlook for shares remains pretty good."

Any forecast hiccup in the sharemarket's current trajectory could lie behind ANZ's decision to launch a margin loan that requires a diversified stock holding.

John Daly says ANZ has a substantial number of clients with "one-stock portfolios". "These could either be chief executives who have exercised options in the company they work for, or investors who hold shares like Telstra or AMP," he says. Daly adds that research from the US shows the average margin loan portfolio there consists of shares in two or three companies.

"That's also the problem here," he says. "Having 100 per cent of your portfolio in one stock is not good." Daly says margin lenders price their loans on the risk inherent in a one-stock holding.

ANZ's product requires a minimum of four shares, which he says is not ideally diversified but offers a better shield against losses, or margin calls, than a one-stock investment.

A diversified portfolio also means less risk for both borrowers and lender.

"You can see that if you had 100 per cent of your investment in Telstra, it would not be good," he says. (Shares in Telstra traded at a high above $9 but have been in decline since the second tranche of shares came to the market at $7.40 in 1999. Telstra was valued in the May 9 Federal Budget at $3.87 a share.)

The diversified margin loan offers investment options in about 1000 shares, Daly says. ANZ's competitors offer far fewer stocks.

Despite the fact investors can spread their risk, they don't get the loan at a discounted interest rate. The floating rate is 8.6 per cent and the fixed rate ranges from 7.75 per cent up to 8.2 per cent, depending on how much money you borrow. But you can borrow more or your LVR can be higher.

If the market falls and you have a narrow buffer or a high LVR, you may face a margin call. But ANZ believes a diversified portfolio offers good protection against a margin call because not all share prices will fall at the same rate. (And RBA statistics show Australians are fairly conservative when it comes to margin loans. The average LVR is 45.6 per cent.)

A Bluepoint consulting adviser, Todd Karamian, says most people have a good buffer between the value of their loan and the value of the underlying equity. But he says investors must understand the risk of gearing.

"If you have $100,000 and you borrow another $100,000 to invest in the sharemarket, and the market does 20 per cent annually, you've made $40,000," he says. "But if it falls 20 per cent, you've lost $40,000, or 40 per cent of your investment."

Karamian says investors must cover their interest costs, buying Australian and international shares to ensure good returns. "You want a good level of franking credits and good dividends so that, after tax, your loan is self-funding," he says.

FISCAL FACT
You'll receive the maximum benefit from pre-paying the interest on your margin before June 30. You may be on a lower marginal tax rate next year, when the tax cuts kick in.

 

[Sean K]

Margin Loaning is great when then market is going up, and is going to go up for another few years - like 3 years ago! Now, the market is due for a rest and maybe a crash, if you think Michael S is right.

Going into a Margin Loan now is still good for the long term as ong as you don't, say, buy 100K of one dodgy specie uranium company! Diversify, diversify, unless you have insider info. In which case please PM me.

The best place for borrowed money right now is in managed funds. Buy any of Platinums and you're safe. Except their tech fund. Very ordinary. Then, use the excess equity as it grows to buy a specie uranium company.

 

[suhm]

Taking out a margin loan allows you to do what you wish. It is a form of gearing and the interest you pay is a tax deduction. Instead of buying property with the money the bank lends you, you are buying shares.

If you are concerned about the money you have in your existing accout then, relative to this topic,
1. put that money into your margin loan account and that money can be used to pay for your portion ( equity) in the shares you purchase on margin.

2. Pre pay some interest this tax year for money you commit to borrowing for margin trading next tax year. This pre paid interest will become this years tax deduction.

Be careful - if you run a margin loan, have some back up cash. It can be in any account , including your margin account, but you will need it if things go south and you enter margin call status. If you do not have back up cash to release you from margin call then the bank, ( they will attempt to contact you first) , WILL sell one of your stocks.

123enen how do you exactly go about parking cash in your margin loan account without paying it off. Does money in a CDIA act as a sort of offset account to the margin loan. Or do you mean that you put the money into your margin loan and draw down some equity if you require access to the money.

I have spare cash which I wish to keep on hand but borrowing money at more than 8% on the margin loan when I have cash sitting in an account earning a little over 5% seems a little silly to me.

Thanks if anyone can give me some help.

 

[tech/a]

Your paid intesrest on any positive balance..

Lets say you have $100K and using margin on average you can recieve around 2 x leverage or 66% on margin.

Your loan and subsequent interest payments wont kick in until you have $101K or more in stocks held.

If you have $120K in stocks held interest is only payable on $20K.
So if over the year of the 200K you could use you only average 160K usage of Margin lenders money then pre paying would have made the money very expensive!

 

[rozella]

G'day suhm,

I think 123enen is referring to place spare cash into the margin account to reduce the borrowings temporarily as the interest is now 8%+, so this would be better than receiving 5% in another account. I do this all the time, it is just like parking cash into your credit card to save some interest.

You will still have the available credit as that depends on the total LVR's of your portfolio + cash. Margin loan accounts are flexible from one day to the other.

 

[rozella]

Must have been typing at the same time tech/a. Just reading your post, I don't think I have ever had a positive balance to take advantage of being paid interest.....maybe Sept 11 2001 for a few days.

 

[laurie]

So if you can bring your interest forward to this Tax year can your sell your shares now and put it in next year Tax return!

cheers laurie

ps sorry slightly O/T

 

[123enen]

123enen how do you exactly go about parking cash in your margin loan account without paying it off. Does money in a CDIA act as a sort of offset account to the margin loan. Or do you mean that you put the money into your margin loan and draw down some equity if you require access to the money.

I have spare cash which I wish to keep on hand but borrowing money at more than 8% on the margin loan when I have cash sitting in an account earning a little over 5% seems a little silly to me.

Thanks if anyone can give me some help.

Suhm,
It's not just a matter of borrowing money versus using your cash. If you borrow through a margin loan you pay the 8% interest BUT you get leverage.

For example with $5000 of your cash you can buy 268 PBL shares at $18.65 each.
If you use that $5,000 through a margin loan you can buy 1072 PBL shares, which have a leverage ratio of 75%. Total value of shares is $19,993.

The bank will loan you 75% of the total value. ie. $14,993 at 8% interest -and you have contributed $5000 of your money.

So it is more than a matter of saying why should I borrow money to buy shares when I already have money. It is more a matter of using your money as collateral to borrow more money.

However IF it is simply a matter of where do I park SPARE cash then as Rozella advises - money in the margin account helps you reduce your interest bill and money in CDIA helps you earn interest. You can draw down your money either way.

 

[suhm]

Thanks for the quick reply rozella and tech/a, this really is quite a helpful forum.

I have been using the margin loan to add a few stocks to my portfolio and as my lvr is quite low I have been letting my interest capitalise. This has been really quite convienient as I only need to deduct the interest owing each year from my tax return. Hence I have never actually put cash in or taken it out of my margin loan account.

I went trawling around the commsec website but its a bit "....." useless when it comes to finding information except when their trying to sell you their product, all I could find was a direct debit form. So I was hoping someone would be able to help me by telling me how to go about parking my cash in the margin account.

Sadly I don't have that much extra money to enjoy a positive balance either rozella.

suhm
P.S. I'm not usually such a technological dunce.

 

[123enen]

Ring CommSec Margin department Ph.131709
Tell them you wish to transfer some money from x account to your margin account. They will do it for you.



http://www.comsec.com.au/Public/InvestIn/PDFs/Margin Loan Brochure.pdf

 

[RodC]

Ring CommSec Margin department Ph.131709
Tell them you wish to transfer some money from x account to your margin account. They will do it for you.



http://www.comsec.com.au/Public/InvestIn/PDFs/Margin Loan Brochure.pdf

You can use bpay to deposit into a comsec margin loan.

Rod.