margin loans - getting too expensive

It's no different to property.

My point was that there are no "tax benefits" in borrowing by itself ... interest is just another cost which you can claim as a valid deduction ... you are not in a better position financially just from borrowing money and claiming the deduction - indeed you are worse off overall, the tax deduction merely reduces the overall loss.

The benefit comes from the gearing magnifying your returns with an assumption that the returns you get are higher than those after-tax borrowing costs.

If you aren't making money on the deal, then you are still worse off, no matter what tax refund you get.

Based on the original post, I'm thinking he was planning on drawing money out of an existing LOC to fund the initial capital into the margin loan ... this makes it effectively 100% gearing.

I've updated my post to include an example of what I mean.. My interest is fully deductible and the fund makes a good profit.

You are very dismissive.. But I should have included my example in my first post. So my apologies.

I'm not making a loss, otherwise I simply wouldn't be doing it. So back to my original point is that even if margin loans hit say 10% I'm paying less. Now people need to do their own research as everyone has different tax rates and everyone has money in different funds which may not be as tax effective..

But the point should still be made!

Yes, but you still aren't getting any tax benefit from the borrowing ... you pay $X interest and you get something like 30% * $X back in deduction (assuming 30% tax bracket) ... meaning you are still 70% worse off after borrowing costs.

thats right

I think atm its safer not to enter into margin loans knowing that it is highly likely that rate rises are coming - ie not much buffer. Fine if you have them already. Using seed captial from a LOC at 7.3% seems like the best option.

If the market had a big fall - id be comfortable using a margin loan - and id probably save this option as funds available when the market drops a lot

Imagine its 87 - market drops 40% - you get a margin loan 50% LVR and hold on through the recovery- you'd make a lot of money

It pays to be cautious

you only have to look back 3 months to see this...

most funds dropped 20%, if you got in on that day you now would of made 20%.. pretty good return

however timing was the issue in the last one, using margin loans you would of struggled to get the right day on the last correction.......

I think I see where you are heading.

The 10% loan allows you to invest $100k this pays 15% or $15K with a full (wishful thinking) 30% imputation thus there is $5k in imputations.

You pay the interest on the loan of $10k and you are left with income in the bank account of $5k and still an imputation credit of $5k.


If you were on 30% flat tax rate (after all tax rates are calculated) then the tax on the $5k income is $1,500 leaving you with excess imputation credits of $3500.

I believe the tax department will now reimburse these credits where you have insufficient income to utilize them.

So then the $10k loan payment has a tax rebate on it of $3500 or conversely reduced the cost of the loan from 10% down to 6.5%.

Cheers

Or imagine its 1929 and the market drops (whatever it drops) and takes another 25 years to get back to the pre 1929 level.

The market did not return to pre-1929 levels until late 1954,[2] and was lower at its July 8, 1932 level than it had been since the 1800s.[3]

Wall Street Crash of 1929 - Wikipedia, the free encyclopedia

As you summed up 'It pays to be cautious'

Cheers

Or people with margin loans on negative geared IPs, capitalising interest.

Interest rates go up, property values flat, compounding debt from capitalising.

Margin call - desperate to hang on to propery, they start borrowing on the credit card.

Bank forecloses, sells property for a shortfall (but they have insurance).

Investor left with a CGT liability (on the property sold by the bank), legal costs, bad credit rating and a large credit card debt.

Costs of a margin call may be much smaller with liquid assets.

Cheers,

Rob

Forgot to mention,

For any interest capitalisers who think they are conservative factoring in a 10% interest rate next year :

10% calculated daily, compounded monthly = 10.47% effective

Cheers,

Rob