Margin Loan with LE

I am about to prepay 6 months interest in advance with Leveraged Equities on my Managed Share portfolio. On the LE website there are two options:

Payment method: Capitalise the amount to my prepaid margin loan
Payment method: Capitalise the amount to my variable margin loan

Can someone tell me what the difference is? Both methods are for prepayments and I thought that if I pay in advance then the loan is fixed.


Bob

Hi Bob,

Capitalising interest means that rather than taking the interest from a bank account, they will add it to your loan.

Exactly the same as compounding interest in interest earnt, though they are earning the interest not you...

The difference is one is variable and the other is fixed (you can generally choose the period and they have an interest rate for that period).

You should call your margin lender to find out more details.

Cheers,

Dan

PS Before making an investment decision speak to your FPA registered Financial Planner.

Bob
When you prepay interest it is indeed at a fixed interest rate, and you have a fixed interest loan for whatever period that you choose to prepay interest.

Capitalising the amount to your prepaid margin loan means that the prepayment interest and additional interest for the prepaid period on prepayment interest funds is added to your total prepaid interest upfront and charged to your fixed interest loan. This option maximises your prepaid interest for tax deduction purposes. This is also nice for the lender as they are charging you an extra bit of interest in advance.

Capitalise the amount to your variable margin loan means the prepayment funds are charged to a variable loan separate to your fixed prepaid interest loan. Interest on variable loan is then charged monthly, at the variable margin loan rate. This option is suitable where you do not need to maximise your prepaid interest. This is a tiny bit less profitable for the lender, as although you are paying most interest in advance, the variable portion is monthly in arrears, very slightly less profitable even though at a higher interest rate.

Margin lenders readily create fixed and varible loan components as required when you prepay interest.

Thanks Tasmo,

Explained well


Bob