Join Australia's most dynamic and respected property investment community

Borrowing against property to buy shares

Discussion in 'Property Finance' started by Rayan, 12th Apr, 2016.

  1. Rayan

    Rayan Active Member

    Joined:
    15th Dec, 2015
    Posts:
    37
    Location:
    Sydney
    Can you get a residential loan, secured against an investment property at residential rates, for the purpose of buying shares or investing in a managed share investment fund?

    If so, do the banks take into account the dividend income for servicing purposes?
     
  2. tobe

    tobe Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    897
    Location:
    Melbourne
    Yes. No. Some might take the 'deeming' rate of their savings account. You might squeeze in some negative gearing benefits from some lender calculators.

    Getting a margin loan is much easier.
     
  3. sash

    sash Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    3,214
    Location:
    Sydney
    Westpac offers margin loan rates around 4.7% for shares....in personal names only.

    I am doing this strategy but under a company so rates are much higher!
     
    Blacky likes this.
  4. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

    Joined:
    4th Mar, 2016
    Posts:
    230
    Location:
    Melbourne
    You can use dividends for servicing, ANZ allows 6% of investment balance, then discounted to 80%.
     
  5. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    1,173
    Location:
    Adelaide, SA
    Yes and no. Some lenders will not want to release equity for share purchases, or they will want you to have received advice from a financial adviser for them to approve - it all comes down to lender selection and how the application is set.

    Dividends can be factored but the policy is very inconsistent across the lenders - so it depends how 'big' you want to leverage into property whether this will play a major consideration into your greater lending strategy, or if this is a minor play.

    Definitely a far cheaper way to access funding compared to margin loans in any case.
     
  6. datto

    datto Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    1,394
    Location:
    Mt Druuiitt
    What if you have say 500k equity and you get a margin loan and buy blue chip shares at 80%.

    So in effect you are buying $2m worth of shares. You'd probably get 7% pa return grossed up dividends easily, maybe more.

    Plus, possible capital gain. Plus favourable tax treatment.

    It could be a way to make a fortune. Especially if you can hold out for say 5 years to allow the markets to recover.

    Sure, there is the seviceability issue and also a margin call dark cloud hanging over you.
     
  7. sash

    sash Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    3,214
    Location:
    Sydney
    The real risk is a margin call.

    Yes the 7% grossed up return is great...but lets say you are leveraged to the tune of say 1.5m with say 500k equity.

    Lets say the market moves down 20%. The value of your investments is now $1.6m..that is margin called territory. They will give you 24-72 hours to restore the balance back to say 80% that is 1.875m so you need to come up with 275k.

    Are you brave enough to do that.

    Though I will acknowledge the risk of another 20% drop in the market is not likely as a lot of stocks have come off by 20-40%.

    I am building up a portfolio but keeping the LVR around 60%. Based on a 100k if there is 20% drop ...I am still reasonably safe.

     
  8. datto

    datto Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    1,394
    Location:
    Mt Druuiitt
    With a margin call you could sell some of your portfolio if need be. Trade clearances are now T + 2, so should be enough time to come up with the cash.

    Sure, your portfolio will shrink but there will be a loss for tax purposes.

    And sure, you need nerves of steel to play this high rolling game.
     
  9. sash

    sash Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    3,214
    Location:
    Sydney
    in your case balls of steel.. ;) ....no way I would be dropping 275 Gs.....not conditioned to lose money. I am building a portfolio shares and want to hit $1m with 60% LVR over the next 4-5 years.
     
    Blacky and Bran like this.
  10. datto

    datto Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    1,394
    Location:
    Mt Druuiitt
    Yeah fair enough. Play safe and sure is the way.
     
  11. Bran

    Bran Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    3,224
    Location:
    At work
    I can't find your other thread Sash... any advance on what portfolio composition have you come up with?
     
  12. Blueskies

    Blueskies Well-Known Member

    Joined:
    24th Aug, 2015
    Posts:
    196
    Location:
    Brisbane
    I have used this strategy for several years now, and plan to do so more in the future. See it as a good way to diversify into other asset classes plus avoid the higher rates and margin calls of margin loans.

    Most recently was able to access ~$200k loan secured by an IP purely for this purpose. This was through Westpac and their only requirement was that I met with their financial planner before approving the loan. Met with him, he tried to sell me their super platform and life insurance, I said no, and away we went!
     
  13. jpcashflow

    jpcashflow Well-Known Member Business Member

    Joined:
    21st Jun, 2015
    Posts:
    371
    Location:
    Melbourne
    YES but it all depends on the lender and current LVR.
    But eg i use NAB trade for my shares i can use my shares as security as well ;)
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,033
    Location:
    Sydney
    Were you charged for the privilage of seeing their salesplanner?
     
  15. Rayan

    Rayan Active Member

    Joined:
    15th Dec, 2015
    Posts:
    37
    Location:
    Sydney
     
  16. Rayan

    Rayan Active Member

    Joined:
    15th Dec, 2015
    Posts:
    37
    Location:
    Sydney
    I don't like the idea of a margin loan for this very reason.

    Thus the idea is to take out equity and NO margin loan and invest the full equity in blue chip shares with a decent return - creating diversification and income.

    I am happy to hear it can be done with the right lender although it sounds case by case basis.

    Has anyone achieved this with larger amounts of equity: say taking over over $1m in equity from an investment to invest fully in Australian equities. Or is there a limit at which the banks are comfortable to lend?
     
  17. D.T.

    D.T. Adelaide Property Manager Business Member

    Joined:
    13th Jun, 2015
    Posts:
    5,596
    Location:
    Adelaide, SA
    Or use a lender that allows higher LVR's.

    Eg Macquarie allows 90% and Commsec allows 70%. If you buy at 60% with either, then the latter is more likely to give you a margin call than the former.
     
  18. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,400
    Location:
    Sydney
    $500K would allow you to buy maybe 400K of shares. So you earn 7% fully franked and then a possible tax shortfall. Then have to service the loan...Lucky to be square.

    Its not at all a sure thing. I just saw someone who bet the farm on a major law firm shares doing this. The loan was $70K and now shares are worth $4K. No chance of income. The fall in market means meeting margin calls OR selling at a loss. All capital tied up / gone.

    So its a gamble on rising value or you are forced to sell down and take losses.
     
    oracle likes this.
  19. D.T.

    D.T. Adelaide Property Manager Business Member

    Joined:
    13th Jun, 2015
    Posts:
    5,596
    Location:
    Adelaide, SA
    Isn't this the same as real estate?
     
    jpcashflow and Hodor like this.
  20. datto

    datto Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    1,394
    Location:
    Mt Druuiitt

    Life is a gamble.

    Margin loan interest about 5%. Return on investment about 7%. So just on those figures your about 2% gross in front.

    I know what you're thinking..what about the interest on the equity release? Well, this plan works best if you are using free cash.

    Also I'd stick to high yield blue chips.

    Yep, I know these stocks have copped a shellacking of late.

    That's why you need to get in at the "right time".