Margin loan v Equity loan

My position is as follows:

Married no kids both in mid 30s

joint income 109k

IP loan 280K (unit in Brisbane)

PPOR value 520K
PPOR loan 245K
Offset 246K

When I first started working I invested into MFs this as you can see has helped with the the purchase of my PPOR. Now while the market is depressed I feel its a good time to reenter the market.

So I was thinking of getting another loan to purchase shares. Looking for tax effective income. What are the pros and cons of equity loans & margin lending. I understand that with a equity loan you are putting up your house as collateral and with a margin loan you need a share package to offer as collateral. With times like these with the market declining you could get a margin call on a margin loan and have to find the money or sell off at a loss to cover the call. With a equity loan you just have to ride it out and make sure you can cover the interest bill of your purchases.

Guess I am sitting on the fence with both types of loans.

Time to get my money working for me......

I think there are two major points - the first is the lack of a margin call with an equity loan - which you've also covered.

Secondly the interest rate on the equity loan should be much lower than a margin loan - at least 1%.

You could easily set up a line of credit against your PPOR, you can do this without even thinking about your first share/MF purchase.

Given that it may take a couple of weeks to get this sorted with your bank, it's smart to get started soon... it's fast approaching bargain time!

But be very vigilant with your LOC, it must be exclusively for income-producing investments, not holidays! But you've proven your diligence already with your fantastic offset record.

Remember that the LOC should cost you zero to set up, and you don't pay a cent for it until you start investing.

A ML will be simpler to setup (they're very keen to have you on board), but as samaka said, there are two very obvious down points vs a LOC.

Have you considered just ripping out some of the cash in the offset? It's pretty much the same thing, without the paperwork. It will also be at your current home loan rate, which is normally slightly cheaper than the LOC rate.

BR

But not deductible!

Hi Rod,

Isn't it about the purpose in which the money is used?

Cheers,

Dan

Yes it is the purpose of the loan that counts, that why Rod_wa is correct.

Using funds from an offset account linked to a non deductable loan does not change the purpose of the orginal PPOR loan to investment. The investment was funded from a offset savings account so directly no deductable interest involved. The increased interest on the PPOR isn't deductable. Now if the offset was linked to an investment loan the story is different.

A lot of people including myself, use both together for investments.

With big market falls like we are having now a margin loan doesnt appeal to me. Thou I can see the gains from having one. By having a foot in each camp I guess you could move your risk around.

If you keep a moderate LVR say 50% against a portfolio which allows a max LVR of 70 ~ 75% you would be able to sustain current drops without a margin call.