Borrowing to invest has previously been a good way in the past to use someone else’s money to make money, and receive the associated deductions through your tax return.
The last 18 months however has caused a lot of pain for some leveraged investors as the market downturn has been magnified through gearing strategies.
What you should be looking at as we run towards the end of the financial year and potentially the end of your prepaid interest period on your loans is the offering of your lending provider.
I have recently reviewed a number of providers in the market and the product solution for margin loans or protected lending is similar, however the contracts differ remarkably.
What should you be looking for?
- Interest Rate – The interest rates vary from one provider offering 8.4% to other providers offering 6.49% this is a remarkable difference for your funding requirements and the cheaper rate will assist in bringing down your break-even point.
- Refund provisions for prepaid interest – Last year saw many portfolios decline in value and where investors had prepaid loans we saw the loan balance came down accordingly. Some providers refund the prepaid amount to investors if the loan balance is paid off while other contracts forfeit this amount.
- Minimum Loan Balance – some providers with margin loan facilities have a minimum loan amount of $20,000. This is the amount interest is charged on regardless of the loan balance. For example if you have a $5,000 loan amount interest would be charged as though you have a $20,000 loan. This could cause the interest rate to be magnified significantly.
As with any loan or debt agreement it is important that you understand what you are signing and getting into. Check your provider and shop around, not all providers are the same and some offer a more flexible solution. If in doubt contact Money Mechanics for a debt health check.
Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics (ph: 6257 5557) a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.
The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.