Capitalising Interest

Hi everyone,

In regards to capitalising interest, is it possible to do this indefinitely? As in, does the interest need to be repaid yearly or can it just be capitalised for the life of the loan (however long that may be)?

Mark

 

Hi Mark

I assume you are referring to a margin loan in which case it is treated as a LOC and as long as the loan to value ration (LVR) is within limits, as set by the lender, the interest can be capitalised at 'infinitum'. Remember lenders want you to grow your debt as long as you can service it.

Mark

 

So what individual investor scenarios should be present to make capitalising interest on a Margin Loan the preferable structure option? ie. under what circumstances is this a smarter thing to do rather than simply pay the interest when it falls due?

 

Hi Mark,

Some mortgages will let you capitalise interest. Usually these are Lines Of Credit (LOC).

With a mortgage you can only capitalis interest until you meet your credit limit, regardless of the current LVR.

Cheers, Medine

 

Excellent! Thanks Mark and Medine.

 

These are a couple of questions I find very relevant to my case, and unfortunately I don't have the answers.

But I sure as hell hopes someone does......I'd love some ideas, or views, or answers

Thanks to all,

Jayar

 

When you're pouring the distributions into non-deductible debt?

 

or when you are using the distributions to fund lifestyle

 

When the underlying growth of the asset is keeping up with the debt growth.

andy

 

Yes.......I guess this is the obvious one isn't it Dave.

A few factors to consider........the fact that generally speaking, most of the income you receive from Distributions will be taxable...........what sort of 'buffer' you are comfortable with between 'return' and 'costs' etc.

May I suggest as a possible future Article by one of experts, 'An Idiot's Guide to Capitalising Interest as Part of an Overall Investment Structure', and I'll be the first to read it.

 

And I'll be a close second !!!!!

Jayar

 

And I'd be very close behind !!!!!

 

Sim - would be great to see a spreadsheet ... this would help visualize some scenarios.

I am terrible with Excel !

 

Until Sim' or other more adept member has a chance to provide a more thorough spreadsheet, I have roughed up a very crude one showing capitalised interest on a margin loan situation.

The yellow cells are variable. The blue make calculations.

I set it to make all yield paid as quarterly distributions. The sheet takes this off the balance of the loan, thereby reducing debt.

Of course to show how the loan will grow if you use the distribution for other purposes (e.g. lifestyle), set the yield to zero.

Hope this helps.

Cheers,
David.

 

Thanks David.

 

Thanks David.

It would be great to also see the Margin Loan debt rising on the same sheet. Would this be difficult to add ?

 

No worries HTL. The figures shown over the 20 years are how the different interest rates and distribution payments effect the Loan.

So if you set Yield to zero, this effectively makes no payments on the loan. You will see how quickly capitalising interest will compound and the debt will get well out of control. Which is:

If you meant something else, in the words of one of our colourful ex-senators, "..please explain".

Cheers,
David.

 

Daviddr, spent some more time analyzing some numbers. I got it now ! Not for the faint hearted ...

Got to love the power of compounding !