NAB Equity Builder - too good to be true?

@Ross36 I've just had my facility approved from NAB, seemed very straightforward and relatively quick (despite this time of the year).

A very slightly different scenario from the one you've proposed above but what I've done is:

1. Used a P&I split (paid out and withdrawn) from a PPOR to buy shares (AFI, MLT, BKI, VGS etc etc)
2. For the sake of discussion NAB are transferring $150K of the AFI, MLT and VGS previously purchased to hold as security for a $200K equity builder facility.
3. The $200k facility is used to purchase $50K of AFI, $50k of MLT and $100K of VGS.

My understanding (not advice) is that I will be able to claim the interest from (1) as a tax deduction as the shares are producing income (dividends) and the interest from (3) as well as the shares purchased with this facility are also income producing.

 

That would probably involve capitalising interest. Seek specific tax advice - could be possible

 

This should be the case.

 

Why would this involve capitalising interest? I thought that this is rarely possible these days without being a scheme (if it is for purpose of paying off PPOR faster).

 

Would you be paying the interest each month?
Or borrowing it from the $100k split:
"Deduct interest from 100K split"

 

Think it's supposed to be that the interest from the split is tax deductible.

 

But is it?

 

If the proceeds from the split was used to purchase shares then the interest should be tax deductible. Shouldn't it?

 

I am not sure what is going on with this split.
Proper advice is needed.

 

Thanks for sharing Martin - that's pretty much exactly what I was thinking of. When you say "the facility is used to purchase..." is it setup like a LOC in that you have been approved the 200K at the low interest rate and can spend it whenever you like or is it a case of you have to get the loan and spend it all at once? I was thinking of using the leverage to dollar cost average in over the next few years, something like 50K share purchase, then lever 50K a year over the next few years to build up the amount invested.

Sorry - poor choice of words. What I mean is that the split would be used to buy the initial packet of shares, and the interest charged on this split would be paid each month and tax deductible. The thing I'm not 100% sure on is the best way to pay the debts. I assume that the dividends from the shares should be paid into the primary PPOR loan, which will then be used to make repayments on the split and the NAB equity builder loan.

Thanks for your input guys

Ross

 

If I understand you correctly you are borrowing $100k to buy shares which will be used as security for an additional loan. In this situation you would pay the dividends into the offset of the PPOR - or loan - and then pay the interest each month with cash. No borrowing to pay interest and no capitalisation of interest.

if the shares are expected to pay dividends then the interest would be deductible.

 

Yes that's what I was thinking - thanks for the feedback!

 

You can decide the amounts and when it is used provided the minimum $10K drawdown is met. Probably the biggest difference to a LOC is that NAB will make the share purchases on your behalf after you've given them instructions.

That looks to be ok - "The approved credit limit can be used progressively, and the minimum drawdown for each new P&I loan is $10,000"

https://www.nabmarginlending.com.au/content/dam/nel/pdf-forms/Equity_Builder_app-kit/NAB_Equity_Builder_How _To_Guide.pdf

 

But will NAB re-assess the value of the existing shares before letting you further drawdown?

 

I tried to speak to someone at NAB about this yesterday, but no one was available.

On the site it says "^The special rate for variable loans applies to new NAB Equity Builder facilities drawn between 1 August 2017 and 31 December 2017."

Does that mean the 2% discount only applies to whatever you've drawn by that date regardless of your approved credit limit?

 

The securities/managed funds/cash you provide the initial security for the approved amount of the loan. Page 4 of the brochure suggests that "Movements in the price of your loan security will not trigger the need for any corrective action from you"

It would be pretty much unworkable to approve a loan limit based on an initial LVR ratio, allow someone to partially access that facility and then deny access to the remaining balance due to a fluctuation in the value of the shares held for security.

I'm a conservative borrower/investor so I wasn't pushing the LVR hard but I'd imagine if you were close to wanting to borrow the maximum amount and contribute the minimum amount of cash then any initial daily fluctuation in the ASX value of the shares may have an impact.

You are extremely limited in what shares you can use the facility to purchase (22 only) although the managed funds are more flexible (950 choices!).

I was using shares on the approved investment list to hold as security as I have no intention to ever sell them but you'd have to ring NAB to find out how it works if you contribute shares not on the list. No problems with cash however.

 

Not really a question anyone on this forum is likely to be able to answer with any degree of certainty (you will need to speak with NAB) but the the rest of the quote states: "The discount will apply for the life of the loan, or until varied or withdrawn by NAB".

Practically if would make their loan calculations a lot more difficult to have part of a loan @4.95% and another part of a loan @6.95%.

That the interest rate may go up is really no different to any variable home loan.

 

For anyone interested, the introductory 'special rate' / 2% discount has been extended to March 18.

 

Can someone more experienced than me review the attached assumptions/calculations are correct?
I'm trying to work out if a yield of 4% would be cashflow positive with an interest rate of 4.95% and within the 37% tax bracket?

 

Yep, this is right.

Bear in mind this product requires payment of principal as well (on a max of 15 year term), which can be quite hefty for cash flows. Still weighing up whether I want to do it.