Margin Loans Margin Loans..how they work!

Not if it's with a separate entity with no directors' guarantee they won't.

 

Hi all,

Could someone please help me understand the returns and costs to do the following:

I wish to use the Navra fund as an example:

Will a bank lend against the fund at 70% Max gearing and 10% buffer?

If so, lets say I gear up to 50% (50K of my own money to make the sums easy)
I also get a loan of 50K.

Therefore Market Value(MV) = 100K
and my LVR is 50%?

Now what would be the interest cost p/a for the loan?

If we use Steve's results of last year which were 22.4% what would the portfolio be worth at the end of the year?

And what would be my LVR after all distributions were re-invested into the fund during the year, but allowing to take out the interest costs for the loan?


Hope this makes some sort of sense?

Thanks,
Stevec.

 

Hi Steve

Let's say the interest on your margin loan is 8.5% per annum.

So the interest cost on $50k borrowing for 12 months interest only will be:

50,000 x 8.5% = $4,250.

Of course there will be some additional minor costs involved (eg loan application fee and the buy/sell spread on the fund) but let's ignore those for present purposes as they are relatively minor.

Now you've got $100,000 in assets in the fund (your $50k + $50k loan funds).

$100,000 x 22.43% = $22,430.

So your gross return is $22,430.

Your net return is $22,430 - $4,250 = $18,180.

BUT it's not quite that simple. If you have a look at the NavraInvest website it says that for the retail fund for the year ended 30 June 2005 the return was: 22.43% with a 16.17% distribution.

What that means is that the total return of 22.43 is comprised of 6.26% unrealised capital growth and distributed income from share trading (including a little bit of dividends) of 16.17%.

Apply those figures here, if you chose to take your distribution rather than reinvest it you would end up with:

Value of your investment in the fund: $106,260 plus
Cash on hand of $11,920, i.e. $16,170 - your interest bill of $4,250.

Give or take a little bit.

Does that assist?

Cheers

 

Thanks for clearing that up Nigel.

 

Thanks Sim for going to so much trouble to make up that spreadsheet. It's great. So for someone like me who has always looked at IP's how can I gauge if its a fairly safe bet to get a margin loan? Obviously there is always a risk, that is what we all do, take risks, to get out of the rat race. With Ip's there is a risk that the property could go down in value, but I look at that as a fairly low risk if it was bought well and had all the attributes. I am highly leveraged in property atm but can sleep very easy at night and if there were threats of interest rate rises that wouldn't concern me much unless they went up to something like double what they are now
As far as getting a margin loan and investing into a fund, it's harder for me to assess or to be comfortable with as it is a whole new line of investing for me. I wish do do it as I need to diversify and would only invest in Navra as I have faith in Steve and his product.
I suppose for me its just a matter of going ahead and doing it. To start off slow and steady and see.
Is there any info out there which states the major drops in the sharemarket over the years? and how that effected funds like Navra?
Enough ramblings for now and thanks Nigel & Sim for the replys.

Cheers,
Stevec.

 

http://www.asx.com.au/about/pdf/all_ords.pdf

Steve,

If you're highly leveraged into property, perhaps it's a better decision to pay down some debt levels and get 11% or so pre-tax guaranteed (since your mortgage is about 7% post-tax) rather than leverage into the sharemarket and hope to make 15%.

 

Hi Nigel,

Want to share some more information on this?

Thanks,

Dave

 

Hi,

5 days have gone by...

Nigel, care to elaborate on the above post? Please?

CHeers,

Dave

 

Hi Dave

Just wanted to build the suspense

I have seen some people manage to organise margin loans for their corporate trustees such that the margin lender has not required directors' guarantees (and in fact not even taken a charge over the trustee company).

The consequence for the individuals involved is that they have no contingent liability which they need to declare to a financier lending to them personally.

What Rolf was quite rightly referring to was the fact that some bank lenders will take the view that borrowings of trustee companies (or trading companies running a business for that matter) which a director has guaranteed are treated as though the director had made the borrowing personally for credit approval purposes.

I.e. say you had IP loans of $500k and the trustee of your family trust had loans of $500k. When you go to the bank, they will say we'll you've actually got borrowings of $1m, not $500k so maybe we won't lend you any more. Their rationale, and it's quite correct, is that the trustee co's debt can come home to roost with you by virtue of the guarantee you've given to the margin lender for the company's debts. Now if there's no guarantee that does not apply.

Shop around (ie download all the application material for the various margin lenders) and see which ones require what form of security.

Cheers
N.