|
Jack already has $50,000 invested in an approved Australian share fund (with a security ratio of 70%). After speaking to his adviser, he is considering three options:
1. Maintaining his investment at $50,000
2. Doubling his investment by borrowing $50,000 through a margin lending facility (a 50% gearing strategy)
3. Increasing his investment even more by borrowing $100,000 through a margin lending facility (a 67% gearing strategy).
The graph below illustrates the potential outcome of these three options after ten years.
Assumptions:
Ten year investment period. Investment return is 8.5% p.a. (split 3% income and 5.5% growth). The franking level on income is 75%. Interest on the loan is 8.0% p.a. Jack's marginal tax rate is 41.5% including a Medicare Levy of 1.5%. Where investment income and tax benefits are insufficient to meet interest payments, a portion of the investment is sold to cover the shortfall. Otherwise the excess investment income and tax savings are reinvested.
As you can see from the graph, the higher the gearing level the greater the potential returns. It must be remembered, however, that Jack still has an outstanding loan in options 2 and 3 of $50,000 and $100,000 respectively. If Jack withdrew a portion of his investment after ten years to repay the outstanding debt (and pay capital gains tax on the amount withdrawn), the value of his investment is shown in the table below.
Value of investment after repayment of loan
Option 1
No gearing |
Option 2
50% geared |
Option 3
67% geared |
| $106,152 |
$123,989* |
$141,826* |
* After CGT on the amount withdrawn
Clearly, margin lending has the potential to help Jack achieve his goals, so long as the value of his investments rises sufficiently.
Learning centreNAB Margin Lending homepage
|
