Taking Equity Out from my PPOR and Invest in Shares

Hi Talis,

You can do what you say, but may I issue a word of warning. If you've been following the news recently, the people who invested through Storm Financial were encouraged to do pretty much what you're suggesting (i.e. take equity our of their PPOR, use that to leverage into shares) and a lot of people got completely wiped out!

Obviously, there are other factors involved, for example the fact that most Storm investors were retirees with little alternative income, but doubling up your gearing can be very risky. When share prices go down, generally all share prices (whether Blue Chip or not) get sold down. Try and think of the worst case scenario, such as current share prices dropping by 50%-60%, which is what happened to most blue chips between 2007 & 2009, and see if you'd get a call on your margin loan.

I'm not trying to disuade you from investing, I have a margin loan for shares myself, but when the market falls you have no control over what happens and if you have to sell, you may be selling at the bottom of the market

Hi Talis,

You're right, I do sound like my Dad ! I must be getting old……

When I got a margin loan, I calculated a 50% LVR (basically, borrow a dollar for every dollar you put in). What I also did was make sure that I had a further 20% in cash that could be put into the margin loan account in an emergency. For example, for every $10,000 you borrow on the margin loan make sure you have a further $2,000 in cash at hand in case the worst happens.
 
If the worst does come to the worst, and you get a margin call, you have two choices; either sell the shares or put extra money into the account. When I was watching the selling on the stock market through the end of 2008 into early 2009, I suspect that most sellers were forced sellers (the one thing you don't want to be, whatever type of investment you have). I was able to put some of my 20% into the margin account and didn't have to sell a thing.

Agree with Terry Interest is dedcutible on the basis that you invested in the expectation that you will receive a Capital Gain.

NWS is a particular stock that is very popular as a Margin loan share but rarily pays a dividend being a growth stock.

Certainly anyone borrowing to invest in such a share would expect the interest to be Tax deductible.

Depends on the bank.

Last week I asked one of the majors this exact question. They said it would be ok if going through a financial planner, but no if going and investing yourself! The trouble is fin planners would charge a fee to go through them.

Their main worry is clients just saying they will invest, but instead will just blow the money when they get it.

A way around it is to use a different lender, or to think of a genuine investment which can be easily cashed in easily.

With the odd exception most lenders will want something from a Financial Planner or a Stat Dec to advise where the funds could be spent.

When we arrange a loan even on a Line of Credit we normally place a copy of our Statement of advice in with the loan submission to advice where we have suggested they invest the funds. If of course the client decides to invest himself elsewhere that is upto him as we dont charge for the S o A where we are arranging the home loan. 

The interest possibly won't be deductible. Especially if you have mixed it with other funds.

You may have lost the connection between the borrowing and the investing.