RaboDirect, Interactive Brokers, Interest Rate Arbitrage

[bellenuit]

Am I missing something????

Currently Interactive Brokers are charging 4.21% interest on margin balances between AUD 100K and AUD 1m (under AUD 100K it is 4.71%).

RaboDirect at call high interest savings account is paying 5.46% interest for the first 4 months for new accounts.

So borrowing from IB and depositing in Rabo should give a 1.25% net benefit over the first 4 months on deposits over AUD 100K and 0.75 on deposits up to AUD 100. This is approx AUD 62.50 per month in interest for the first AUD 100K and approx AUD 100 in interest per AUD 100K for amounts above AUD 100K borrowed/deposited for the first 4 months at what seems little risk to me. (It obviously assumes that you have enough shares with IB to borrow that amount on margin).

Both rates are subject to changes in RBA rates, but since the deposit is at call, one should be able to pay back the margin loan in at most a couple of days (as you would need to transmit though an intermediate bank) if rates go against you. However, it is more likely that the net difference would remain the same if RBA rates change.

Am I missing something? I can't see tax being an issue as the margin loan is borrowed for investment purposes, so you effectively are only taxed on the profit made.

 

[white_goodman]

Am I missing something????

Currently Interactive Brokers are charging 4.21% interest on margin balances between AUD 100K and AUD 1m (under AUD 100K it is 4.71%).

RaboDirect at call high interest savings account is paying 5.46% interest for the first 4 months for new accounts.

So borrowing from IB and depositing in Rabo should give a 1.25% net benefit over the first 4 months on deposits over AUD 100K and 0.75 on deposits up to AUD 100. This is approx AUD 62.50 per month in interest for the first AUD 100K and approx AUD 100 in interest per AUD 100K for amounts above AUD 100K borrowed/deposited for the first 4 months at what seems little risk to me. (It obviously assumes that you have enough shares with IB to borrow that amount on margin).

Both rates are subject to changes in RBA rates, but since the deposit is at call, one should be able to pay back the margin loan in at most a couple of days (as you would need to transmit though an intermediate bank) if rates go against you. However, it is more likely that the net difference would remain the same if RBA rates change.

Am I missing something? I can't see tax being an issue as the margin loan is borrowed for investment purposes, so you effectively are only taxed on the profit made.

how do you get the funds of a margin loan for stock purchases essentially into a savings account?

 

[bellenuit]

how do you get the funds of a margin loan for stock purchases essentially into a savings account?

Interactive Brokers lets you withdraw funds from your margin account so long as you don't exceed their margin requirements.

Lets say you have $30K in cash in your account and no stock, and their margin requirements allow you to buy $100K of ABC with the $30K so that you end up owing $70K. If instead, to begin with, you have $0 cash but $100K of ABC, they will allow you to withdraw $70K in cash out of your account and transfer to another institution. From their perspective, the end result is the same. However, it is up to you to prove to the tax man that the $70K is for investment purposes, so that the you can claim interest paid against it as a tax deduction, otherwise the arbitrage would be a lot less than my calculations.

The more I think about it the less attractive it appears. To get your money from IB to Rabo requires going through an intermediate account (as Rabo only allows deposits/withdrawals to a linked account). So it would be a minimum of 2 days paying interest to IB and not receiving interest from Rabo on the way over and another 2 days on the way back. If we work on the basis of just transferring $100K, then at 4.71% charged by IB, the 4 day transit will cost you $52. This is against an arbitrage gain of $62.50 per month on the first $100K. So over the 4 month special honeymoon rate with Rabo, this is a net gain of $196. Although it appears easy money, you are still dealing with $100K and it could easily fall apart if something were to go wrong, such as it taking longer than 2 days to transfer or perhaps a major disruption to the financial system by a stock market crash.

 

[Kee37]

Great find though, it's good to see old fashion mis-pricing are still available to the opportune eye.

 

[IFocus]

What would worry me is where the hell is Rabo lending that money to when interest rates are so low

 

[bellenuit]

What would worry me is where the hell is Rabo lending that money to when interest rates are so low

It's not untypical as a honeymoon rate. More or less all of the providers of high interest savings accounts offer a honeymoon rate for new customers. Typically 1% or more (Rabo is 1.16% more) than their normal rate for existing customers. The honeymoon period is usually from 4 to 6 months. They probably have little profit margin when on lending those funds attracted that way, but they are relying on savers staying with them after the honeymoon period is over.

Personally I think it is ridiculous. Many people just move to a different bank for high interest savings when the honeymoon period is over. I have been through Bankwest, BOQ, Westpac, Ubank and am not with RaboDirect. When that is done with I will return the funds to my CommSec Investment Account which offers a good standard rate (currently 4%) and integrates nicely with my share trading.

I think it is a poor reflection on banks when they offer new customers better rates than their existing customers. I'll take the money OK, but they get zero loyalty from me.

 

[Bill M]

When that is done with I will return the funds to my CommSec Investment Account which offers a good standard rate (currently 4%) and integrates nicely with my share trading.

This account has been dropped to 3.5%, I don't park any cash in there anymore. The best right now in Australia that I can find is Rabo's HISA at 5.46% and that's where my money is right now, cheers.

 

[bellenuit]

This account has been dropped to 3.5%, I don't park any cash in there anymore. The best right now in Australia that I can find is Rabo's HISA at 5.46% and that's where my money is right now, cheers.

CommSec used to display the CIA rate on their home screen, but I had to dig deeper to find it this time. It is still showing 4%. I wonder if they removed it from their front page but forgot to make the change on the lower level screen shown below. However, 3.5% seems a bit low. They were 4% up until the most recent interest rate drop by the RBA which was only 25 basis points.

http://www.investing.commsec.com.au/bettertogether

 

[Bill M]

They were 4% up until the most recent interest rate drop by the RBA which was only 25 basis points.

http://www.investing.commsec.com.au/bettertogether

Don't look there it is wrong. Log in, go to Portfolio, then click the cash management tab, under that tab click the word interest, then under the Account drop down menu click on your investment account and down the bottom it gives you the current interest rate. It clearly shows 3.5% there for all balances. Of course they won't be advertising those poor interest rates. On a 100K that is like around $2,000 worth of lost interest per year.