Margin Loans

Hoping someone can help me get my head around margin loans and account workings.

I understand what a margin loan is and how they work.

What is not clear is what accounts are(or need to be) setup and how they all work together.

Some specific questions:

1. Are you restricted to certain brokers (online or otherwise) depending on your margin lender? ie. can commsec be used regardless of margin lender?

2. What accounts are setup with the margin lender? Is it just the loan account and does this work in the same way as a LOC against a property?

3. Do you just place all your cash/savings into the margin loan account and invest from there? or do you still have a separate account with a bank where you keep your own funds seperate from the loan funds?

4. If you want to invest under a trust structure, does this mean that both the broker account and the margin loan must be under the trust name, or just one or the other? What is recommended here?

I probably will have a few more questions, but I will wait till I get some responses on these first.

thanks

Hi Triple H

I'd suggest talking to your proposed margin lender. But my experience has been:

1. I've used Commsec with BT.

2. Margin loan account is set up in my case by X Co as trustee of the Ward Family Trust. From memory they designate that as "X Co Ward Family Account". Importantly your broker "third party account" needs to have the same account designation I think.

3. Separate. I just give them authority to "debit account for $X and please drawn loan funds of $Y to buy $X+Y worth of units in the ABC Fund. Here's the completed new/additional application form for the ABC Fund." and they execute it.

4. I'm pretty sure the account designation must be the same. But again, ask the lender.

Hope that helps.

Cheers
N.

Thanks Nigel

Commsec/BT is the combo I am looking into, so at least that part is ok.

Leads me to a few more questions...

1. Say I have a loan account with BT, how does having another brokerage account (non loan account) with commec fit into the scheme of things?

If you can buy and sell straight out of the BT loan account, what is the purpose of say a commsec investment account? Wouldn't it be best to keep your cash in the BT loan account to reduce interest on the loan while the funds are not invested?

2. With commsec I believe you have to tell them which account to use, and to change accounts is not an instant thing to do. Takes a number of days. Again, if you have the two accounts, how do you "switch" between them for investing? Do you need two seperate commsec accounts?

Another one..

If you want to start trading, how does the margin lender work out how much they will loan you initially when each share has a different LVR they will lend on?

1. Yes you have two commsec accounts with different account numbers. One is your usual trading account and the other is your third party account linked to the BT margin loan. Bear in mind brokerage is much higher on the third party account with this set up.

2. Yes you need to be using the third party account if you want to buy on margin. To switch between then you just log in using the appropriate account number.

Well that's how I do it. There may be a better way...

They figure it out based on the overall portfolio LVR. Without doing an example sum here if you had mostly 70% LVR shares and just a few spec shares that have a 40% max LVR then your portfolio permitted lvr would be somewhere around the 68-69% mark.

Conversely if you had just a few 70% LVR permitted shares and mostly 50% permitted LVR shares your portfolio permitted LVR would be around 51-52%...

You get the drill...

N.

So what is the idea behind this?

Why wouldn't you want your cash savings and margin loan amount in the one account? Do you not mix your own money with the margin loan?

I understand that part, but what happens when I first apply for the loan. Say I apply for a BT margin loan and have say 50K of my own cash. How do they work out the loan amount if I don't own any shares yet?

sorry, yet another question while you are all thinking about the others...

The two margin lenders used the most seem to be BT and LE.
Is there any problems with commsec for the margin loan?

It seems you can get better brokerage fees and would streamline if everything was with them. The interest rate also seems better for "standard - low end" investors like myself.

Is there any downsides with commsec margin lenders, such as fewer individual shares they will lend against or hidden fees etc?

I think it's because NavraInvest is off the approved list with commsec