NAB Equity Builder - too good to be true?

Discussion in 'Sharemarket Investing Platforms, Tools & Services' started by BPhil, 27th Nov, 2017.

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  1. BPhil

    BPhil Well-Known Member

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    Hello, long time lurker here, I have been running some numbers on this thing and wanted to share... I was originally excited by the prospect, but now not so sure.

    The idea with equity builder is that you can borrow for (certain, reliable) shares at a much higher LVR than usually granted with shares, without the risk of a margin call (max = 75% LVR for AFIC, Argo and MLT), and (at least for now) 2% cheaper than the normal margin rate. This is massively appealing at first because the main advantage that property has over shares is the greater ability to leverage and the lower interest on that leverage; this would level the playing field.

    The catch is the loan is P&I, which means a) you can't hold as large an asset pool for a given level of serviceability, and b) you have a fat wad of non-deductible payments to go along with your deductible interest. Some basic numbers to see the effects in terms of portfolio development *if you already have some equity*.

    Scenario 1:
    300k equity in PPOR converted to LOC at 5%, which is used to buy some stable LICs with dividend reinvestment giving growth of 10% pa. After 15 years you've paid 15k pa interest for a total of 225k (with associated deductions), but now your portfolio is worth 1.25m (yay). Less the loan, equity is 0.95m.

    Scenario 2:
    Let's say the above was the limit of serviceability you are comfortable with (and for some reason this doesn't change for 15 years -- hey it's just the back of the napkin here). So you are willing to pay 15k pa. With NAB Equity Builder (NABEB?) you pay off principal steadily, if loan term is 15 years (the max) and payments 15k pa, their calculator has you at a loan of 158k. After the 15 years at 10% the portfolio is worth only 660k, albeit owned outright.

    So the assets you get to sit on are much less if at your servicing limit. In this example the equity is 44% higher the first way, as you were able to borrow more.

    It should be noted, I think NAB will actually let you borrow against this equity if you use their Builder product, ie not as a margin loan -- not 100% on this, but this would give you some ability to "snowball", ie build equity exponentially.

    Scenario 3:
    Interest paid in Scenario 2 was 67k total according to NAB calculator. If we wanted to compare things such that we pay equal interest in each scenario (same deductions), that would be a loan of about 531k. This is a bigger loan than was possible with the LOC. It corresponds to about 50k pa in P+I. Of course, portfolio ends up proportionally bigger at 2.2m.

    Scenario 4:
    What if we went for the max LVR of 75%, using LOC as 25% deposit? We would borrow a cool 1.2m, and pay 144k pa P&I. Final portfolio size is 5m, or 4 times better than Scenario 1. But serviceability is almost 10 times worse!

    Scenario 5:
    Finally, what's the annual damage if the investment is the same size as Scenario 1, ie 300k? NAB says about 28.5k, ie almost double the servicing requirements of Scenario 1, if you want to achieve that same portfolio size.

    So in summary, I started out thinking this product was almost too good to be true! Then I realised, it was =p If you already have some equity and want to buy shares, converting to an IO loan or LOC still seems like the way to go, unless you have a massive income burning a hole in your wallet.

    Property is still king for (serviceable) leverage it seems.
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    It doesn't mention it directly, but looking at their website it appears to be secured by property.

    NAB Equity Builder - NAB Margin Lending

    It identifies the following risk:
    I'm having trouble in seeing how this differs from a regular P&I investment loan other than:
    * It has less features (no offset account).
    * It has a higher interest rate (quoted discounted rate is 4.95%, P&I investment loans with NAB are currently pricing below 4.8%).
    * NAB will only allow you to use it for certain share purchases (not sure if that's good or bad).
    * They might be taking both property and shares as security - effectively cross collateralising all of the assets involved (this is really, really bad for the customer).

    The only real advantage I can see over a regular investment home loan is they ask less questions when applying for the loan. There's little mention of the qualifying criteria. This could also be good or bad depending on the circumstances.
     
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  3. Nodrog

    Nodrog Well-Known Member

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    Just had a quick look.

    I thought they seem to be using “property” in a generic sense to mean shares / managed funds?

    If restricting the selection of shares / funds allows a lower rate to be charged AND NO margin call well that sounds reasonable. The same applies to restricting the loan to P&I. 11 - 15 year P&L loan may be possible if LVR limited to 65%.

    I thought the greatest appeal might be to those who don’t hold traditional property (eg IP / PPOR) available as security?

    But I may well be wrong.
     
  4. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    I could be wrong too. It could be a pure margin loan simply with a P&I twist. That would make it a good deal. This is just something I'd want to check out thoroughly before I committed.

    I'll ask about it the next time I meet with my NAB guy.
     
  5. pippen

    pippen Well-Known Member

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    Found this on a nabtrade webinar
     

    Attached Files:

  6. Nodrog

    Nodrog Well-Known Member

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    I just rang NAB about this. As I thought PROPERTY simply means the LICs / ETFs / Managed Funds as security. I told them it was confusing. I don’t think the person I was speaking to knew what a LIC was even though a number of these are available as allowed investments. She mentioned ETFs and managed funds.

    I think because the NAB Equity Builder product is restricted to managed funds (Listed and unlisted) as opposed to individual companies they’re using “property” rather than “equities” as a reference.

    And given only “diversified” lower risk funds are allowed as investments they’re able to offer the “NO MARGIN CALL”.

    Approved “LISTED” Investments, there are a heap of managed funds (941) available also. More than enough to build an excellent portfolio in my humble view:
    E44A3745-02B9-419D-B5A2-EC8B7CBD1762.jpeg
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    9CC54042-1BAA-4A16-B515-5998A1CE0693.jpeg

    And a quick search showed excellent fund Mgrs such as IML offering unlisted Managed Funds are included in the 941 funds available:
    35818B9A-72FD-4820-A6B5-013D7AAD7E14.jpeg

    Approved Investments - NAB Margin Lending
     
    Last edited: 28th Nov, 2017
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  7. PandS

    PandS Well-Known Member

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    look and smell like a twist of the current stock market instalment warrants
     
  8. Nodrog

    Nodrog Well-Known Member

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    Perhaps less confusing for your typical investor in managed products?
     
  9. Nodrog

    Nodrog Well-Known Member

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    Good find thanks.

    Main slides and simple examples from the document:

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    Last edited: 28th Nov, 2017
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  10. oracle

    oracle Well-Known Member

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    I also called them up. You don't need property as security. They will approve loan based on your serviceability.

    Regarding P&I loan terms they said if LVR 60% they will approve loan term to be 15 years if higher than loan term is 10 years max.

    Regarding interest rate if you qualify for $2million credit limit they will drop the interest rate from 4.95% to 4.65%.

    Personal name or Trust no issues just need extra documents if applying as Trust.

    You don't have to draw down the entire loan balance at once. You can draw down gradually over period of time.

    I think its great product to build wealth if you can make it work for you. Interest rate on offer is very competitive. All 3 LICs (ARG, AFI and MLT) which are included offer 75% LVR. and have grossed up dividends greater than 5% at today's prices. So borrowing costs <5% and income >5% you pocket the difference, enjoy any capital growth and don't have to worry about margin call. What more can you ask for :D

    Cheers,
    Oracle.
     
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  11. Invest_noob

    Invest_noob Well-Known Member

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  12. mcarthur

    mcarthur Well-Known Member

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    So how's this different to going into a bank and asking for loan for "some dividend producing shares"? Essentially a loan, based on serviceability but not crossed with a house; not a margin loan. I did this with CBA about 6 months ago. NAB rate is slightly better I admit, but it doesn't seem to be something that's NAB specific...
     
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  13. oracle

    oracle Well-Known Member

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    Did they ask for any security in return for the loan? Were they going to use shares you buy as security? What kind of interest rate did they quote if you don't mind me asking?

    Cheers,
    Oracle.
     
  14. mcarthur

    mcarthur Well-Known Member

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    No security (either shares or property). But they did look at the portfolio for serviceability, and my PPOR is in CBA (but it's not crossed).
    Rate started out at 5.15 or something, but that was at the recent height of the banks saying no; more recently it's relaxing and I've complained enough to be down to 5%. I'm holding off some complaining for even better :) I've only invested about 50% of the loan so far.
     
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  15. FFCHASER

    FFCHASER Member

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    so is it correct to say that this is a margin loan'' on share without margin call?
    and the main risks are
    interest rate movement
    dividend reduction or skipped
    management fund/EFT unit price fluctuation?
     
  16. oracle

    oracle Well-Known Member

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    Yes...you have pretty much summed it up. Good thing is because it is P&I loan you are constantly paying off the principal so your equity is increasing.

    Cheers,
    Oracle.
     
  17. Invest_noob

    Invest_noob Well-Known Member

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    This is a risk

    Screen Shot 2017-11-28 at 1.01.24 PM.png
     
  18. Observer

    Observer Well-Known Member

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  19. oracle

    oracle Well-Known Member

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    Yes, but chances are if you stick to old LIC like ARG, AFI, MLT and index ETF like VAS chances are their profile/liquidity are not going to change hence risk of the bank suddenly wanted to reduce exposure to those stocks are minimal. But you are right the risk exists.

    Normally, what I have seen is the banks will gradually reduce the LVR before completely removing from their approved list. So 75% LVR goes down to 70% then 65% and so forth.

    You should get plenty of opportunity to get out before the bank drops one of the above security from their approved list. But highly unlikely IMHO.

    Cheers,
    Oracle.
     
  20. mcarthur

    mcarthur Well-Known Member

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    Ouch. That's pretty silly. I reckon that's just b*tt covering, but it wouldn't have hurt them to grandfather unapproved ones rather than force you to sell.
     
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