Margin Loan

Discussion in 'Finance & Banking' started by Car513, 24th Apr, 2017.

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  1. Car513

    Car513 New Member

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    I am new to investing and just got a margin loan. Question - am I able to draw out funds from my margin loan account to fund investment activities outside of the approved list? Say to put down for a house deposit or to buy an unlisted private company or use it for a debt recycling strategy?
     
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  2. twisted strategies

    twisted strategies Well-Known Member

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    ( disclosure : i am biased against margin loans , for all but the very savvy investor ).

    i believe this is possible , but have you thought of the risk factors , say your margin loan is leveraged on a large TLS holding ( which may yet fall below $4 ) and you cash assets are entangled in a house mortgage ( not exactly easily accessible ) , things can go badly wrong ( and did in the GFC for some ).


    cheers
     
  3. Simon Hampel

    Simon Hampel Founder Staff Member

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    You'd have to check with the individual margin products as to whether they allow you to use it as a general line of credit.

    I believe that some do, yes - but obviously you need to be very careful about managing your LVR to ensure you don't get into margin call territory.

    Generally, I'd be reluctant to do so unless you have a very large margin facility and the amount you are borrowing from it is relatively small.

    Scenario:

    $100,000 of shares/funds held @ 50% LVR = $50,000 margin loan.

    Draw down $20,000 to use for house deposit, margin loan becomes $70,000 @ 70% LVR

    Given that many blue chip funds have a LVR limit of 70% or less, you've basically maxed out your LVR and are at significant risk of margin call.

    Obviously borrowing $20,000 when you have a $1,000,000 margin facility is going to have a lot less impact on your LVRs.

    The key issue is that when you buy approved shares or funds with your margin borrowings, it has a lesser impact on your LVR because the shares/funds you buy come with their own LVR.

    Example:

    $100,000 of shares/funds held @ 50% LVR = $50,000 margin loan.

    Purchase $25,000 of shares/funds ... loan becomes $75,000 total value is now $125,000 so LVR = 60%

    Borrowing on margin to fund other activities which the margin lender won't actually lend against (ie anything other than an approved share or fund) has a much greater impact on your LVR and thus introduces a lot more risk.

    Flipping it around somewhat there used to be equity margin loans which were tied to residential property - you essentially borrow against the value of you property to buy shares/funds and there is no (or minimal) risk of margin call because of the security provided by the property. Of course, if everything goes horribly wrong you do face the risk of losing the property, but the risks are generally much lower.
     
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  4. Corey Batt

    Corey Batt Well-Known Member

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    Some margin lenders will indeed allow you to draw out the funds and can be used for other purposes - but not ALL lenders will allow this.

    The alternative funding obviously is if you do not go a direct margin loan facility - draw from existing equity on a property which will generally be cheaper, no margin calls from share price decreases etc. There are some great products in this market designed for this which can allow you to debt recycle your lending over and over so you can rapidly reduce your non deductible home loan debt and draw equity to build a portfolio of shares. (or property or any other investment purpose)