NAB Equity Builder - too good to be true?

Next up ARG

Which has historically a lower mean return but higher maximum and lower minimum returns, a symptom of more price volatility. The highest returns also occur in the ten years prior to 06/07 where share prices experience a significant run up before the GFC. I was unable to locate data for this period of AFI and goes some way to explaining the difference in volatility.

 

I realise I neglected to mention that the 'scenario after tax returns' does not account for CGT at the end if the 10 year period. It accounts only for the income tax and deductibility of the loan.

If anyone is interested in any other related stats or historical analysis let me know and I'll see what I can do.

 

Now the index STW. Returns in the share price seem more volatile, with a much longer period of negative returns leading into the GFC. View attachment 23238

 

And finally VTS (US total market). I couldn't locate a decent historical data set in AUD so had to analyse only a 5-year period. VTS shows significantly better total returns over the 5-year period, though this may be a result of the time period bias considering it is all post GFC.
Dividend returns are dismal but this could be good for taxable environments.

 

VTSAX is quoted in USD has a better set of historical data available. The returns are less impressive, however the main difference is that returns come mostly via capital gains rather than dividends.

The other point of interest is the significant recovery in the post-gfc capital value, compared to the asx which the price has stagnated and is only just recently reaching pre-GFC highs. The US market shows subdued returns as a result of the dot com bubble and the GFC which came around 10 years later affecting returns in the early 00's the most.

 

One final graph for a comparison of them all with the 10 year total return for each daily close price.

 

Someone knows if you have to pay for brokerage when instructing NAB to buy shares into one of the approved securities?

 

Yes, i think so, mine was $15 on a 15k purchase. It was included in the amount (ie i asked them to buy 15k worth and they bought 3330 shares @4.50 + 15 brokerage

 

That is cheap! Are you sure it is not $14.95 for a 5K purchase?

 

It may well be, i've only made the one purchase via the product and that's what was charged
I did note that $15 for 15k purchase is cheaper than their nabtrade rates, which is $20

 

At an interest rate of 4.95% to the customer, and a risk‑weight of 20% for regulatory capital, that works out to give a healthy return-on-equity for the lender of almost 20%. And since the principal is being paid down, the risk-adjusted return improves steadily over the life of the loan. Finally, and unlike with mortgages, the collateral value is partially, maybe even substantially, hedgable, given that they are lending against broad‑based ETFs, LICs, mutual funds, at modest LTV ratios.

This looks like a win‑win product (?) Sensible, but not extortionate return on equity, and a manageable risk profile for the lender. And it fills a credible gap in the market for those investors who want to build their wealth by cnservtively leveraging an equity market exposure, especially for that (increasingly large) subset of investors who do not have enough (or any) equity in a PPOR to lend against.

I only hope that:

1. APRA don’t ramp the risk‑weight associated with this type of lending above 20%, without some compelling empirical evidence that this figure is too low, or that

2. The lender doesn’t start getting greedy on the rates: a 2% increase (which eliminates the claimed discount from margin lending rates) would push the return on equity for the lender to about 28%. Is that excessively high, for a government-backed lender?

 

I can confirm. On my Equity Builder, I paid $14.95 brokerage for purchasing $10,000 worth of shares.

It is odd that it's cheaper than the NABTrade brokerage rates...

 

Has anyone considered "double" gearing using equity builder?

For example...

Borrow to invest 50k in, say, VDHG using a loan split from your home loan, (and normally the interest on this split would then be tax deductible if you could show the funds were used directly to purchase the shares)

Then use those shares as the 30% "deposit/security" for equity builder and borrow another 70% worth of VDHG

I'm not sure if the original 50k home loan split would still be tax deductible though doing this strategy

Is anyone doing anything similar/has considered this strategy to get extra gearing?

 

Why not just take the split loan and use the 50k as deposit? Can you explain the benefit of making the first share purchase?

 

Yes it would be - provided the shares are income producing.

 

How about drawing equity out of your parent's family home and using those funds together with a maxed out margin loan on an ASX blue chip stock. Oh, I forgot, your parents know nothing about this as you have forged their signatures. Make or break lol.

 

I think because doing it the way you suggest, the loan funds were not used directly to purchase the shares? Hence may not be tax deductible?

Actually i'm not sure. When i did my first equity builder loan (NOT using this strategy btw), i did use a cash deposit, which they direct debitted out from my savings account. I guess that is a pretty 'direct' path for the funds to go (ie if one directed them to draw the funds direct from the loan split)

Interesting... this strategy could then be useful to accelerate your asset accumulation quite nicely: albeit with a significant cash flow hit from the NAB equity builder loan being P+I, and of course with the usual risks that come with gearing.

I really like the equity builder product, but now that I am doing debt recycling with my home loan, i don't really have much use for the product. However with this strategy... things could get interesting

 

You forgot the if, the big IF.

if shares increase in value.

 

Yes - this is essentially what I’ve done/am doing. Very happy with results so far and the simplicity.

 

What's your LVR? From what I understand, if you go under 30% LVR, you can suspend principle payments.