Gearing VDHG using PPOR equity

Hello all,

What am looking to do?

I am in mid-30s in Victoria, I am thinking of borrowing 200K from my PPOR equity to invest in income-producing ETF/LIC in my wife’s name to hold for long term (at-least 10 years). Wife is currently on maternity leave and does not intend to work until mid-2023. When she does get back to work, her tax bracket will most likely be 32.5%.

Our situation at the moment:

We have a PPOR valued at 900k. PPOR loan comprises of: 200k non-tax deductible loan, and 250k debt recycled loan (invested in 40% VGS, 60%VAS), both loans secured against PPOR.
On paper, looks like I have 270k useable PPOR equity on 80pc LVR.

Also, I have an IP which is slightly positively geared.

From what we’ve learnt from having Kid #1 (childcare & other kid expenses) and that we have home renovation expenses coming our way, I dont think we’ll be saving much on a single salary for the next 1.5 years until my wife heads back to work.

So I am considering tapping into PPOR equity, take out 200k of it and invest. Why let equity sit idly when it can work for me?

As we’ll save diddly squat for the next 1.5 years, it is essential the net dividend income from the ETF/LIC covers the P&I repayments for the 200k loan. I am considering locking the 200k loan on a sub 2% Fixed P&I OO rate for 2 years.

So I’ve been looking these options and wondering what you think?:

Option A: 100% VDHG

What I like:

1. Seems to give 6-7% net dividend yield. After 32.5% tax* is paid on the Net dividend, the returns should still cover P&I repayments. If interest rate rise in the next 2-3 years to 4% or so (unlikely i think), there is enough fat in the dividend returns to cover repayments.
2. The extra tax due to restructuring will work in favour due to my wife's low tax rate as she wont be working.
3. VHDG is crazy diversified.

*(i.e. wife’s tax rate, the tax rate could be even lower in the next FY as she wont be working)

What I am not sure about: Ideally, instead of chasing dividend yield, I would prefer to invest in an ETF that gives me capital growth so I could sell and lump sum pay off the home loans. But, I clearly dont want the burden of 200k P&I mortgage payment on a single income. Are there any other options other than VDHG where I could invest in?

Option B: LICs (AFI, MLT, ARG, WHF) - decent dividend return with full franking credits. But, concentrated heavily in Australia. Mixed feelings investing in LICs considering what I've read in other threads here.

I also considered:

Option C: DHHF - 100% equities which is great, but not enough dividend return to pay for the borrowed loan.

Option D: VAS + VGS - my preference. it’s what i used for debt recycling. again, not enough dividend return to cover loan repayments

Keen to know what you folks think about all this. Thanks in advance! Cheers

 

Your wording might be off, but you want to borrow and your wife invests? if so you would need to onlend to her first, otherwise interest would not be deductible.

 

Hi Terry
Yes, PPOR loan is 100% on my name. So if the bank approves the 200k equity loan, I was of the understanding that I can transfer the funds from the Equity Loan account to my wife's broker account to buy shares under her name.

I am not aware about onlending. Have you written an article or tip about that?

Thanking you!

 

She cannot claim the interest as she hasn't borrowed it, and neither can you as you haven't any income connected to it.

Tax Tip 340: Borrowing When the Money will be Used by Someone Else Tax Tip 340: Borrowing When the Money will be Used by Someone Else

 

I think lawyer need to draft agreement between you and your wife. Terms need to clearly written down in contact format...

 

Thank you Terry. Valuable tip and will take advise specific tax advise before proceeding. Cheers.

 

Still seeking opinions if VDHG is the right choice for my circumstances or is there any other ETF/Share I could explore?

TIA

 

VDHG gives the appearance of higher yield because some of its underlying international assets are hedged and the AUD moved higher. When the AUD falls VDHG will pay out less than say DHHF for example whose international assets are unhedged.

You should be looking at total return and not yield in any case as far as I'm concerned. Wealth will be created (or not) depending on the differential between total return and borrowing rate. Yield just effects cash flow and as equities aren't lumpy assets you can sell a few to pay the mortgage if yield cash-flow is not sufficient so its no big deal.

 

If the market tanks 50% this strategy is not so much fun. Chasing a few extra percentage points looks a bit ordinary when you are faced with a 50% loss of capital.

Going to an investment advisor for this type of stuff is a good idea. Just make sure they are independent. If they are conflicted it doesn't make them bad - just be mindful of the conflict.

 

I assume you mean an advisor can help stick to the plan when the market tanks by 50%?

 

And recommend the etf strategy to start with.

 

I agree in part with this assessment. You are leveraging an already risky asset, so be sure that you understand the full risk and that your predicted returns are comensurate with the risk. Based on interest rates today, it sounds like a good decision, but interest rates can go up, and up, and up (see circa early 1990s).

Another consideration is that you want to avoid selling at big losses, so ensure you have some sort of buffer to protect you from that situation.

You could also buy GEAR or GGUS if you want leverage, although there is some drag over the long term.

 

The market is at all time highs in an unusual environment with support being pumped through the economy. It’s risky. Sitting tight for a year or so until your wife returns to work may not be a bad thing. Using cash rather than debt to invest in ETF’s and LIC’is appealing. There is a saying in investment circles “Don’t risk the ranch”…..