Margin loan vs. equity in primary place of residence

Semillon · 18 May 2009

This is my first post, please be gentle.

I understand that some investors under some circumstances will borrow money to invest in the share market (margin lending), so clearly it must be profitable for at least some people to do so.

I believe that the interest rates on such loans will be higher than those one would pay when investing in property.

So what happens when you have income above and beyond what is required to pay off your mortage? Most people would make extra repayments as this is a low risk way of saving money, however if your home is your only asset, you run the risk of being wiped out if the housing market were to crash.

Assuming that a person was to do the required research and invest in the share market at a sensible way, would you theoretically be better off putting at least some of the funds set aside for extra repayments into a completely different area in order to balance out your risk? Especially if interest rates on the mortage were very low?

ROE · 18 May 2009

Re: Margin loan vs equity in primary place of residence

Semillon said:
This is my first post, please be gentle.

I understand that some investors under some circumstances will borrow money to invest in the share market (margin lending), so clearly it must be profitable for at least some people to do so.

I believe that the interest rates on such loans will be higher than those one would pay when investing in property.

So what happens when you have income above and beyond what is required to pay off your mortage? Most people would make extra repayments as this is a low risk way of saving money, however if your home is your only asset, you run the risk of being wiped out if the housing market were to crash.

Assuming that a person was to do the required research and invest in the share market at a sensible way, would you theoretically be better off putting at least some of the funds set aside for extra repayments into a completely different area in order to balance out your risk? Especially if interest rates on the mortage were very low?

Margin lending can only yield you profit on the way up..
on the way down you are F**K

No investment will ever give your 100% certainty that you will always come out a head.

What gearing level you want to take up is all up to you... just remember
gearing is double edge swords...

now if you talk to any decent people with money or old money millionaire like doctor, dentist,lawyers profession and not some financial adviser who milk fees for a living, most of them will tell you, you better off pay off your mortgage first and ignore all other investment decision until you do so.

Whether people follow that simple but effective advice is another story
some like to chase big return, some are not happy that paying off the mortgage is a good idea when their friends and family off to buy another few properties or some share portfolio

I did follow that very simple and effective advice some years ago and never look back.

The market can drop 50% or close for 5 years and it wont change or effect my life style
Dividends just filled my coffer twice a year
which in turn get reinvested into better business and when I feel like a
new toy I just tap into the dividend pool and buy what I need debt free.

and if you ask me now is the BEST time not to do anything but pay off your mortgage while the rate is low as you can knock more off in shorter time

why would you want to pay off your house when the rate is high but not when it's low?
higher rate you make little inroad into principle, low rate you cut through principle like hot knife through butter

drsmith · 18 May 2009

Re: Margin loan vs equity in primary place of residence

Semillon said:
So what happens when you have income above and beyond what is required to pay off your mortage? Most people would make extra repayments as this is a low risk way of saving money, however if your home is your only asset, you run the risk of being wiped out if the housing market were to crash.

Whatever a home is worth in a given market it is still a roof over one's head.

SM Junkie · 19 May 2009

Re: Margin loan vs equity in primary place of residence

I think you need to consider the size of your mortgage and what your goals are? Are you looking to pay it off within a timeframe? What sort of security are you after? For many owing their own home outright is the ultimate goal.

Next is can you handle the volatility of the market right now. It looks good because we are in a rally, but that won't always be the case. How will you feel when your stocks lose their value.

Do you want to enter the stockmarket at this point in time because you are afraid you might miss out?

Have you got a trading/investment plan for when you do enter the market? What type of stocks would you invest in?

Do you understand margin loans and the risk of margin calls once this rally is over? Can you meet that call or will you have to sell your shares at a loss?

Really think about why you want to do this. Personally I'm happy to stay in the market because it is my money, so it is an acceptable risk. Perhaps that is another option, start with $5k or so of your own money that you are willing to risk and get a feel for it before you consider a margin loan.

Good luck

awg · 19 May 2009

Re: Margin loan vs equity in primary place of residence

Semillon said:
This is my first post, please be gentle.

So what happens when you have income above and beyond what is required to pay off your mortage? Most people would make extra repayments as this is a low risk way of saving money, however if your home is your only asset, you run the risk of being wiped out if the housing market were to crash.

Mate, if the Oz housing market crashes, so long as you dont have to sell, you will be relatively unscathed.

However, if you have a high % margin loan, and Oz property crashes, high probability, would lead to a leg down in equities, thereby wiping out your equity, at minimum.

Nothing wrong with equity investment to balance, but I would be very wary of margining atm, unless you are an experienced investor, notwithstanding different asset classes often dont move in sync

Semillon · 19 May 2009

Re: Margin loan vs equity in primary place of residence

I should clarify that I have no interest in entering into a margin loan arrangement. Also I consider buying a house to live in to be a lifestyle choice as opposed to an investment - mortgage repayments are the price of that lifestyle choice.

So the lifestyle choice has been made and currently we are pouring approx 1/3 of our monthly savings directly into the loan as extra repayments and keeping the other 2/3 as cash for the time being (offsetting the mortgage obviously).

SM Junkie: Your questions are all very good, before spending the time doing the research required before making any investment decisions, I want to decide if repaying the mortgage with all of our savings is the best idea or if we should avoid putting all our eggs into the one housing basket.

Since one of the basic tenants of investment is to diversify, my gut tells me to continue to put approx 1/3 of our savings into the mortgage since this is a relatively risk free investment, assuming the housing market remains stable. The other 2/3 should be in an arena that is not directly linked to the housing market if possible... the share market seems like the best choice to me.

Kez180 · 19 May 2009

Re: Margin loan vs equity in primary place of residence

Semillon said:
I should clarify that I have no interest in entering into a margin loan arrangement. Also I consider buying a house to live in to be a lifestyle choice as opposed to an investment - mortgage repayments are the price of that lifestyle choice.

So the lifestyle choice has been made and currently we are pouring approx 1/3 of our monthly savings directly into the loan as extra repayments and keeping the other 2/3 as cash for the time being (offsetting the mortgage obviously).

SM Junkie: Your questions are all very good, before spending the time doing the research required before making any investment decisions, I want to decide if repaying the mortgage with all of our savings is the best idea or if we should avoid putting all our eggs into the one housing basket.

Since one of the basic tenants of investment is to diversify, my gut tells me to continue to put approx 1/3 of our savings into the mortgage since this is a relatively risk free investment, assuming the housing market remains stable. The other 2/3 should be in an arena that is not directly linked to the housing market if possible... the share market seems like the best choice to me.

Wouldn't it make more sense to put all the savings straight into the offset? ie, you'd be paying the same amount of interest, but maintaining access to more money...

Semillon · 19 May 2009

Re: Margin loan vs equity in primary place of residence

Not exactly, the loan is split between fixed and variable, the fixed rate is over 2% higher than variable currently and the offset applies only to the variable component.

Extra repayments directly into the fixed rate loan (up to an annual cap) yield greater returns, I will just about hit that cap with the current extra repayment values.

jono1887 · 19 May 2009

Re: Margin loan vs equity in primary place of residence

Semillon said:
Not exactly, the loan is split between fixed and variable, the fixed rate is over 2% higher than variable currently and the offset applies only to the variable component.

Extra repayments directly into the fixed rate loan (up to an annual cap) yield greater returns, I will just about hit that cap with the current extra repayment values.

isnt there usually a cap on the extra repayments you can make on the fixed interest component per year... i think its generally around 10k-20k a year, but depends on the loan amount and which bank ur with...

Semillon · 19 May 2009

Re: Margin loan vs equity in primary place of residence

jono1887 said:
isnt there usually a cap on the extra repayments you can make on the fixed interest component per year... i think its generally around 10k-20k a year, but depends on the loan amount and which bank ur with...

Correct, as stated I will come in just under that cap this financial year (and likely the next 1.5 financial years as well)

Amor_Fati · 19 May 2009

Re: Margin loan vs equity in primary place of residence

Borrowing to buy shares can make sense if it allows you to reduce your non-deductible (home-loan, car-loan, credit card) debt because the interest on the loan for the shares is tax deductible.

So rather than buy 20k of shares with cash, you pay 20k off your home loan, you now have an extra 20k of equity which you borrow (at the same rate because it is secured by your home) to buy shares. So you save the interest on 20k of home loan and pay interest on 20k of shares but that interest is deductible! Makes sense to me. I've never understood why some people seem to think margin lending is the only way to buy shares with gearing. This way you don't have the nasty margin calls that crystallise losses.

So what you're suggesting seems sensible to me, as long as you have the experience and understanding that is necessary for any investment in the share market.

PS Not advice, talk to a professional etc

ROE · 19 May 2009

Re: Margin loan vs equity in primary place of residence

I don't know why many people consider their home as an investment.
To me that's a liability you must have (roof over your head)

so many people should live in the cheapest place they can and save the rest and invest.

your home doesn't produce any income for you, but it cost you a whole lot more
in maintenance, council tax so I consider it's a liability.

Semillon · 20 May 2009

Re: Margin loan vs equity in primary place of residence

ROE said:
I don't know why many people consider their home as an investment.
To me that's a liability you must have (roof over your head)

so many people should live in the cheapest place they can and save the rest and invest.

your home doesn't produce any income for you, but it cost you a whole lot more
in maintenance, council tax so I consider it's a liability.

I tend to agree, it's a lifestyle choice. At best you are speculating on a capital gain...

Hazza · 3 June 2009

Re: Margin loan vs equity in primary place of residence

ROE said:
I don't know why many people consider their home as an investment.
To me that's a liability you must have (roof over your head)

so many people should live in the cheapest place they can and save the rest and invest.

your home doesn't produce any income for you, but it cost you a whole lot more
in maintenance, council tax so I consider it's a liability.

I totally agree with that. Have you been reading Rich dad, poor dad? Haha. It may be an asset on paper but in reality the home is creating more debt than you had without the home. There is no definitive conclusion that the value of your land will go up so it is very speculative like the above poster said. Most people take out a mortgage, pay council rates, pay land tax, maintence costs etc etc.

The only income you can get is from renting the place out but what I've notice when people do that is that it still ends up being negative gearing. Also it eliminates the main residence capital gains tax exemption. People do that all for the sake of claiming the deductions on their tax return? Please, you might as well just ask your tax accountant to increase their fees. It's the same thing. People who do this type of negative gearing are idiots.

Do you think it's possible to go through life with financial freedom without ever taking out a mortgage or margin loan? That's my lifetime goal until I die. Only time will tell on the decisions I make through life.

Trevor_S · 6 June 2009

Re: Margin loan vs equity in primary place of residence

Semillon said:
So what happens when you have income above and beyond what is required to pay off your mortage? Most people would make extra repayments as this is a low risk way of saving money, however if your home is your only asset, you run the risk of being wiped out if the housing market were to crash.

I have long recommended that the optimum home loan repayment is $12 per thousand per month because this is about a 10-year term provided rates stay between 6 per cent and 9 per cent. Once your loan is down to a 10-year term you can gain more by borrowing to place more assets under your control than you can save in interest by increasing repayments on the housing loan.

Noel Whittaker

Margin loan vs. equity in primary place of residence

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