2. 2 How to borrow? When gearing into property then you simply obtain a loan from a bank or broker When gearing into shares or managed funds you obtain a “margin loan” from a bank Commsec give competitive rates on margin loans and also waive entry fees on managed funds Note: Make sure you use an accountant for your tax Lot’s of possible mistakes – especially with investment properties
3. 3 Capitalising interest Capitalising your interest is attractive if you are investing long-term in an asset that will go up in value. You don’t have any loan repayments … the interest payments are just added to the principal of the loan But … the principal outstanding will grow exponentially! Interest payments are still tax deductible since you have still been charged for them! Bottom line – no loan repayments … but can still claim tax deductions for the interest charged. Attractive if you keep a low gearing percentage (eg. 50% of asset value)
4. 4 LVR and margin calls LVR stands for Leverage Ratio LVR = $margin loan / $total investments Margin loan provider will allocate different LVRs to different types of shares and managed funds. Eg. Colonial First State Australian Share Fund = 75% If value of investments fall so that loan amount is more than LVR + 5% then you get a “margin call” Deposit cash within 24 hours to reduce loan amount and bring your LVR back down to the maximum level (eg 75%), or Sell shares or units in your managed fund to bring it down to pay off loan and bring LVR back down (usually sold at “low” point)
