LIC & LIT Leveraging to buy shares

You can but you face time decay and it is not free it has a cost which is far too complicated for someone who just want to buy shares on leverage

 

Yep. Always turn a simple question into a complicated answer.

 

I have thought about using a small amount of leveraging but less than my emergency fund.

So emergency fund sits in offset against PPOR loan, investment loan is deductable and if the poo hits the fan then the emergency fund can be used to wipe out most/all of the loan.

I feel that having that emergency cash gives me flexibility rather than investing directly. I be paying a small % for that privilege but I think it worth it.

 

There is probably a lesson in leverage to be taken from this week.

 

Buy more?

 

I have funds available in redraw ~$190k Facility setup under family trust.
Thinking of leveraging this into something simple like VAS.
Interest rate on the facility will be 3.38% at the end of this month.
Issue is that it's P&I once drawn down, can't be switched w/out assessment which probably won't happen due to changes.

Thought is drawing down $100-160k of this ideally with return of ~5%+ gross up return.

Love to point out pro/cos what I might be missing.

$160,000 @ 3.38% P&I (29 years) = $722p/m x 12 = $8,664 p.a

$160,000 @ 4% = $6,400 p.a
$160,000 @ 5% = $8,000 p.a
$160,000 @ 6% = $9,600 p.a

Potentially capitalising interest (by using available redraw), thoughts from accountants regarding issues here.

 

Use the maxima as the benchmark. Leverage the percentage drop from the benchmark.

E.g. recent VAS maxima is $90. Drops 10%, then leverage 10% of your available $190k = $19k. buy $19k around $80-$81.

If it drops 50% to $45 then leverage $95k.

Only for diversified index funds like VAS or VGS.

Not advice, thought experiment only.

 

Sounds pretty logical, I originally thought of larger parcels.

Using GFC being last major drop, which was ~60% so at each 10% drop putting in $30k
That would get $180k if it went all the way to 60% which I don’t think it will, but who knows.

 

OK, so finishing our application for LOC on PPOR today to buy up more Vanguard Wholesale units whilst they are cheap. Feeling calm and rational about this approach.

 

@DoggaPP are you going to use the full limit of the LOC straight away as lump or DCA?

 

DCA

 

Which lender and product did you go with? Was the application process quick? Can PM me if you'd rather.

 

Margin loans? Yes

Investment loans secured by residential property? No (IMO)

Not advice

 

Of course this assumes you have residential property to leverage against.

 

Naturally. The reason I raise it is that every time anyone mentions leverage with shares, everyone jumps in to say how risky margin loans are. And margin loans are risky. If you bought shares 3 weeks ago using a margin loan, you would be at risk for having the margin called now.

However, margin lending is not the only way to leverage into shares and people need to understand this. Previously, I took out a $300,000 investment loan secured by a residential property. It was supposed to be for a build but I ended up using it to buy another property. I could have used it for shares, or traded funds or an overseas holiday. The point is the purpose of the loan was "for investment purposes" so the bank didn't really care what I used it for (so long as I made the repayments).

In terms of repayment it's kind of triple protected too. The loan was secured against a rental property, so I had rent to cover the repayments. Then if I had used the loan funds to buy VAS (for argument's sake), the dividends are another income stream to cover repayments. As a final check, I have a job, so if push came to shove I could use my salary to cover repayments. I see that as low risk. Not at all like a margin loan.

Ok, so let's say I buy VAS at $90. That would net me about 3,333 shares. If the price of VAS dropped to $50, I would still have my 3,333 shares, so from that point of view I haven't lost anything real. The bank can't margin call my loan because it's secured by real property. I can ride out the downturn and it should not affect my income from the shares too much.

The other side is when the markets are going well. The rental property is increasing in value and the shares are increasing in value, so it's kind of like getting double growth in some ways.

I see a lot of upside in this strategy.

 

Roof over your head, tax free capital gain, no land tax and source of low cost funding to leverage equities. Ah, home sweet home

 

State Custodians. Very easy process thus far. Loan approved and funds will be available early next week. We own our house outright and have no other debt and both have good jobs so there were no real hurdles. LOC is for 25 years.
edit-typo

 

Make sure you really understand how these geared ETFs manage their debt ratio. In an environment like the one we are in now they are forced to constantly maintain their ratio by selling shares as the market falls. Say you bought at the start of the week before the heavy falls, if by some miracle the asx were to bounce back next week you would find that geared ETFs would not recover by the same amount.